Annual Report and Financial Statements 2019

ANNUAL REPORT AND FINANCIAL STATEMENTS 2019 HEATHROW AIRPORT LIMITED ANNUAL REPORT AND ACCOUNTS COMPANY REGISTRATION NUMBER: 01991017 OUR PURPOSE TO MAKE EVERY JOURNEY BETTER

OUR VISION TO GIVE PASSENGERS THE BEST AIRPORT SERVICE IN THE WORLD STRATEGIC REPORT At a glance 6 Our approach to taxation 58 Key financial and operational indicators 8 Our approach to risk management 60

History of Heathrow 10 Our principal risks 62 Our business 12 Task force on climate related financial disclosures 64 Operating review 18 Section 172 (1) statement 72 Our strategy 22 Our commitment to sustainable growth 30 Financial review 48 Our approach to capital allocation 56 GOVERNANCE REPORT Group structure 78 Audit Committee 94 HAHL Board of Directors 80 Remuneration Committee 98 Executive Committee 84 Nominations Committee 104 Corporate governance 86 Finance Committee 105 Chairman’s introduction 86 Sustainability and Operational Risk Committee 106 Governance structure 88 Directors’ report 108 Roles and responsibilities 90 Directors’ responsibilities 111 Composition of the HAHL Board and its committees 91 2019 HAHL Board activities 92 Effectiveness 93 FINANCIAL STATEMENTS Independent auditor’s report 114 Income statement 116 Statement of comprehensive income 117 Statement of financial position 118 Statement of changes in equity 119 Accounting policies 120 Significant accounting judgements and estimates 131 Notes to the Company financial statements 133 Additional unaudited information 154 SECTION 01 STRATEGIC REPORT

At a glance 6 Key financial and operational indicators 8 History of Heathrow 10 Our business 12 Operating review 18 Our strategy 22 Our commitment to sustainable growth 30 Financial review 48 Our approach to capital allocation 56 Our approach to taxation 58 Our approach to risk management 60 Our principal risks 62 Task force on climate related financial disclosures 64 Section 172 (1) statement 72

4 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 5 AT A GLANCE

Heathrow flies into the 2020s having landed nine consecutive years of growth Heathrow soared to the best year in its history welcoming a record 80.9 million passengers in 2019 (+1% vs 2018). The share of UK exports handled through Heathrow increased to 40%, strengthening our position as the UK’s biggest port. New investments and cutting-edge technology boost passenger experience Visitors to the UK have received a first-class welcome following Heathrow’s investment of over £12 billion in private money to boost the experience – including building Terminal 2 and rolling out e-Gates, enhanced security scanners and a new digital tower. Skytrax 80.9m crowned Heathrow’s terminals as world’s best seven times in the last ten years, with 82% of (+1.0%) passengers passengers rating Heathrow as “Excellent” or “Ver y Good”.

6 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Healthy financial Expansion of Heathrow GOVERNANCE REPORT performance On 27 February 2020, the Court of Appeal concluded that the Government was required but failed to take Heathrow remains in strong financial health: revenues account the Paris Climate Agreement when preparing climbed 3.5% to £3.0 billion on the back of increased the Airports National Policy Statement (‘ANPS’). The demand to fly – supporting an additional £856 million Court declared that the ANPS has no legal effect unless of investment into the airport in 2019. Adjusted EBITDA and until the Government carries out a review of the rose 2.0% to £1.8 billion. Remaining competitive in the policy. The Government declined to appeal to the lead-up to expansion continues to be a priority: strict Supreme Court directly, but Heathrow and other operating cost discipline while prioritising service, interested parties have applied for permission to operational resilience and investment in growth has appeal the Court of Appeal ruling. The timing of this driven adjusted costs per passenger pre IFRS 16 up decision, given the current COVID-19 environment, is 5.0% to £14.19. uncertain at this time. FINANCIAL STATEMENTS

Heathrow eyes zero-carbon future after starting 2020s on carbon-neutral footing

In January, Heathrow became carbon-neutral and started working towards operating zero-carbon airport infrastructure by the mid-2030s. It remains clear that unless expansion meets strict environmental targets, no additional capacity can or will be used.

ANNUAL REPORT AND ACCOUNTS 2019 7 KEY FINANCIAL INDICATORS

REVENUE 2019 2,976 £2,976m 201 2,874 Revenue is an indicator of Heathrow’s top-line growth. It consists 201 2,828 of aeronautical income, which is generated from fees charged to airlines for use of the airport’s facilities, and retail and other income from a variety of other sources. Passenger growth continued to contribute to increases in revenue which grew 3.5% in the year.

1 ADJUSTED EBITDA 2019 1,828 £1,828m 201 1,792 Adjusted EBITDA is an indicator of how Heathrow is delivering top-line 201 1,752 revenue growth while remaining efficient and controlling operating costs. Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value gains and losses on investment properties. A focus on efficiency combined with revenue growth resulted in adjusted EBITDA growth of 2.0%.

PROFIT BEFORE TAX 2019 819 £819m 201 602 Profit before tax is a measure of total return generated before 201 804 taxation. Profit before tax grew by 36.0% in the year. Profit before tax includes non-cash fair value movements on investment properties and financial instruments. These movements can cause significant fluctuations year on year.

1 REGULATORY ASSET BASE 2019 16,598 £16,598m 201 16,200 The Regulatory Asset Base (RAB) is a regulatory construct, based on 201 15,786 predetermined principles not based on IFRS2. It represents the capital invested in Heathrow for which we earn a regulated return. By investing efficiently in our airport, and constructively engaging with airlines, we add to our RAB over the long-term and this in turn contributes to delivering shareholder value. Heathrow continues to invest in its operations and the RAB increased 2.5% in the year.

8 ANNUAL REPORT AND ACCOUNTS 2019 KEY OPERATIONAL STRATEGIC REPORT INDICATORS

PASSENGERS 2019 80.9 80.9m 201 80.1 The sum of all arriving and departing passengers. 201 78.0 To beat our plan, we aim to maximise the number of passengers we serve in a year while providing best possible service. We welcomed a record 80.9 million passengers travelling through the UK’s only hub airport, up 1.0% on last year.

PASSENGER SATISFACTION 2019 4.17 4.17 201 4.15 An independent passenger satisfaction survey that compares 201 4.16 GOVERNANCE REPORT Heathrow’s performance against 350 airports worldwide. Passengers rate their experience with a score out of 5.00, where one is ‘poor’ and five is ‘excellent’. Our vision is to give passengers the best airport service in the world. We achieved a record high level of passenger satisfaction in 2019.

DEPARTURE PUNCTUALITY 2019 78.5% 78.5% 201 77.6% The number of flights that depart from their stand within 15 minutes of 201 80.2% the scheduled time. Departure punctuality improved to 78.5% in the current year, contributing to our plan to transform customer service.

BAGGAGE CONNECTION 2019 99.0% 99.0% 201 98.8% To improve service for every 1,000 passengers (direct and connecting) we 201 99.0% measure the percentage who successfully travelled with their bags on the

same flight. We put a great passenger experience at the heart of what we FINANCIAL STATEMENTS do; our operational ambition is ‘every passenger, every bag, every time’. 99.0% of bags successfully connected in the current year.

LOST-TIME INJURIES 2019 0.34 0.34 201 0.33 We measure the number of lost-time injuries for every 100,000 hours 201 0.48 worked in the last 12 months. In their working life a person works an average of 100,000 hours. We want everyone at Heathrow to go home safe and well to their loved ones at the end of each day. Lost time from injuries was broadly stable in 2019 at 0.34.

1 Alternative Performance Measures (APMs): the performance of the Company is assessed using a number of APMs. Management believe the APMs provides investors with an understanding of the underlying performance of the Company, while recognising that information on these additional items is available within the financial statements should the reader wish to refer to them. APMs are discussed in detail and defined on page 154 of the financial statements. 2 There is no GAAP difference between International Financial Reporting Standards (IFRS) and Financial Reporting Standard 102 (FRS102).

ANNUAL REPORT AND ACCOUNTS 2019 9 HISTORY OF HEATHROW

For over 70 years, we have been an Work demolishing Heath Row and clearing land for the runways started in 1944. However, by the time the war had integral part of the UK and its history. ended the RAF no longer needed another aerodrome and it was officially handed over to the Air Ministry as London’s new From a private airfield to one of the civil airport on 1 January 1946. The first aircraft to take off from Heathrow was a converted Lancaster bomber called world’s busiest international hub Starlight that flew to Buenos Aires. airports, a lot has changed in that time. The early passenger terminals were ex-military marquees which formed a tented village along the Bath Road. To reach In 1930, British aero engineer and aircraft builder Richard aircraft parked on the apron, passengers walked over wooden Fairey paid the Vicar of Harmondsworth £15,000 for a duckboards to protect their footwear from the muddy airfield. 150-acre plot to build a private airport to assemble and There was no heating in the marquees, which meant that test aircraft. during winter it could be bitterly cold. By the close of our first operational year, 63,000 passengers had travelled through During World War II the government requisitioned land in and London’s new airport. around the ancient agricultural village of Heath Row, including Fairey’s Great West Aerodrome, to build RAF Heston, a base By 1951 passengers had risen to 796,000 and British architect for long-range troop-carrying aircraft bound for the Far East. Frederick Gibberd was appointed to design permanent An RAF-type control tower was constructed and a ‘Star of buildings for the airport. David’ pattern of runways laid, the longest of which was 3,000 yards long and 100 yards wide.

1955 Her Majesty The Queen opens the Central Terminal Area and Control Tower. 1930 Richard Fairey purchases 150-acre plot to assemble and test aircraft. 1946 1964 London civil airport The Beatles are mobbed officially opens. at London Airport. 1940 1960 1950 1930 1970

1966 The British Airports Authority is created. London Airport is renamed ‘Heathrow’. 1944 Construction of London 1969 Airport’s runways begins. Terminal 1 opens.

10 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

The focal point of Gibberd’s plan was a 122ft-high control By the time we celebrated our 60th anniversary in tower. There was also a passenger terminal called the Europa 2006 we had served around 1.4 billion passengers on over Building (later renamed Terminal 2) and an office block called 14 million flights. the Queens Building. Terminal 5 opened in March 2008 and marked the beginning In 1969, Terminal 1 opened, by which time five million of an exciting new chapter for Heathrow. The brand-new passengers a year were passing through the airport as the jet Terminal 2: The Queen’s Terminal opened for business on 4 age arrived with Boeing 707s, VC10s and Tridents taking June 2014. travellers from Heathrow to and from all parts of the world. Today, as recognised by Skytrax, we are the best airport in The 1970s marked the decade when the world became even Western Europe and amongst top 10 globally. We are also smaller thanks to Concorde and wide-body jets such as the one of the world’s busiest international airports, and the UK’s Boeing 747. As the decade drew to a close, 27 million only hub airport, with over 80 million passengers travelling passengers were using Heathrow annually. Demand for air through the airport annually on services offered by 82 airlines travel also created the need for another terminal, Terminal 4, travelling to over 200 destinations in over 80 countries. GOVERNANCE REPORT which opened for business in 1986. We look forward to continuing our story, and continuing to connect all of the UK to global growth.

1987 2008 2019 The British Airports Authority Terminal 5 is officially opened by Her Majesty Heathrow welcomes is privatised as BAA plc. The Queen in March; the first commercial a record 80.9m A380 flight arrives at Heathrow UK. passengers.

1999 2016 1986 The Terminal 5 public Heathrow celebrates His Royal Highness planning inquiry ends – 2009 the longest in UK history. its 70th anniversary. Prince Charles and Terminal 4 undergoes Princess Diana a major refurbishment FINANCIAL STATEMENTS inaugurate to improve facilities. Terminal 4. 2000 2020 1980 1990 2010

2014 1976 The new Terminal 2: The Concorde makes its Queen’s Terminal opens for first passenger flight. business on 4 June. 2018 1998 MPs overwhelmingly The Heathrow Express vote in favour of rail service is launched. Heathrow expansion.

ANNUAL REPORT AND ACCOUNTS 2019 11 OUR BUSINESS

WHAT WE DO We serve a range of market segments, including business and leisure travellers, direct and transfer passengers, and long We are a service business which seeks to give passengers the and short-haul routes operated by a diverse range of major best airport service in the world. We are the UK’s only hub airlines. As well as earning aeronautical income from airlines, airport. Hub airports combine direct passengers, transfer we also generate income from a variety of other sources. passengers and freight to enable long-haul aircraft to fly to They include concession fees from retail operators, income destinations all over the world. These destinations could not from car parks, advertising revenue, rents from property be served by point-to-point airports which rely on local space and income from the provision of airport facilities demand alone. We currently are the busiest passenger airport and transportation services, notably the Heathrow Express in Europe and the seventh busiest airport globally. rail service. 120 We maintain a strong focus on operational performance, 100 111 improving the passenger experience and investing in new and 100 upgraded facilities. This focus and investment has resulted in 0 88 81 84 86 86 76 76 Heathrow being named ‘Best Airport in Western Europe’ by 0 75 Skytrax for the fifth consecutive year and ‘World’s Best 0

Passengers (m) Passengers Airport Shopping’ for the tenth consecutive year in 2019. 20 As the economic regulator for UK airports, the CAA assesses the market power of airports and if an airport passes the market power test(s) set out in the Civil Aviation Act 2012 (the 'Civil Aviation Act'), the airport is regulated by means of a licence. Heathrow has been determined, by the CAA, to hold signi cant market power and operates under a licence granted by the CAA in February 2014. The licence includes a price cap on Heathrow’s airport charges. Sustainability is core to our growth strategy. We have 0 launched Heathrow 2.0, a long-term sustainability strategy which sets out a series of ambitious targetsThe to deliver economic regulation is designed to allow the UKs regulated airports to generate revenues which are sucient to nance their operating and capital expenditure requirements, and provide a regulated rate of return on their RAB. Each regulatory period usually lasts ve years. D D A sustainable growth and to drive positive change throughout S

L A the aviation industry, as well as at the airport itself. CG T T

C O As part of our Heathrow 2.0 plan for sustainable growth, we E US A M E have recently published our new carbon plan showing how we will act over the next ten years, alongside airlines, Top 10 busiest global airports 12 months to manufacturers, governments and passengers. It includes clear 31 December 2019 goals that will help us to get our own emissions to net-zero, help the whole industry achieve a net-zero future and use our In 2019, we served a record 80.9 million passengers scale to help the wider economy decarbonise too. (2018: 80.1 million) completing our ninth consecutive year of passenger growth. Further details of our commitment to sustainable growth can 120 be found on pages 30 to 47. 100 80 60 40 12 ANNUAL REPORT AND ACCOUNTS 2019 20 0 STRATEGIC REPORT

INVESTMENT AND INFRASTRUCTURE We have invested over £12 billion of private money at no cost to taxpayers transforming Heathrow’s infrastructure since privatisation in 2006, including £856 million invested in 2019 (2018: £793 million). To support and develop Heathrow’s role as the UK’s only hub airport, we will continue to enable the success of the major network airlines operating at Heathrow. We will do so by investing in further capacity, operational flexibility and resilience. Improving the passenger experience is supported by ongoing investment in modern airport facilities and operating processes.

Terminals Each of our four operational terminals is either new or recently

refurbished. The busiest terminals are Terminals 2 and 5. GOVERNANCE REPORT Terminal 2, which opened in June 2014, served 18.9 million passengers in 2019 (2018: 18.5 million) and Terminal 5 served 32.8 million passengers in 2019 (2018: 32.8 million). Our total terminal capacity is currently estimated to be 85 million passengers per year. We have a total of approximately 58,600 square metres of retail space served by over 450 retail outlets.

Runways Our two parallel runways generally operate in ‘segregated mode’, with arriving aircraft allocated to one runway, and departing aircraft to the other. To mitigate noise impact to residents living below the approach and departure routes, the runways for arriving and departing aircraft are normally swapped at around 15:00 each day, or as weather conditions dictate. The airport is permitted to schedule up to 480,000 air-traffic movements (ATMs) per year. In 2019 we operated at 99.1% (2018: 99.1%) of this cap.

Other infrastructure FINANCIAL STATEMENTS We own railway infrastructure including stations, tunnels, rolling stock and track from Heathrow as far as Airport Junction on the Great Western Mainline. We also own public car-park spaces that are available to passengers and the general public. The terminals and their approaches provide advertising space, which yields further income.

ANNUAL REPORT AND ACCOUNTS 2019 13 OUR BUSINESS STRATEGIC REPORT (CONTINUED)

REGULATORY ENVIRONMENT Our regulation is consistent with the economic regulation of other UK regulated industries (such as telecoms and the energy We are subject to economic regulation by the Civil Aviation sector). This form of economic regulation is sometimes referred Authority (CAA), which is the independent aviation regulator to as ‘incentive regulation’, in that Heathrow has an incentive in the UK, responsible for economic regulation, airspace policy, to invest in better facilities for consumers and outperform the safety and consumer protection. As the economic regulator for economic settlement by attracting more passengers, reducing UK airports, the CAA assesses the market power of airports operating costs or delivering higher commercial revenues. In and if an airport passes the market power test(s) set out in the the opposite case, we must absorb negative financial impact, Civil Aviation Act 2012 (the ‘Civil Aviation Act’), the airport is with no adjustment for shortfalls in our passenger numbers or regulated by means of a licence. Heathrow has been additional costs unless agreed with the CAA. determined, by the CAA, to hold significant market power and operates under a licence granted by the CAA in February The regulatory environment provides cash flow predictability 2014. The licence includes a price cap on Heathrow’s airport which supports external investment. Other key factors and charges. protections include: The economic regulation is designed to allow the UK’s • The CAA has the statutory duty to set a return that regulated airports to generate revenues which are sufficient to secures financeability of our operations. finance their operating and capital expenditure requirements, • Building blocks rebaseline at the start of every regulatory and provide a regulated rate of return on their RAB. Each period which restricts long term risk exposure. regulatory period usually lasts five years. GOVERNANCE REPORT • Certainty and defined timing for recoverability of capital The Economic regulation sees the CAA setting the maximum investments through the RAB. level of airport charges for Heathrow using a per-passenger • Pricing and asset value linked to inflation (RPI). price-cap mechanism (RPI +/- X) which incorporates an allowed • Some protection against exceptional circumstances, for return on the RAB. example changes in security regulation proposed by the The building blocks of this ‘Single Till’ calculation are illustrated government, changes in traffic mix, intra-period on the following page. The CAA first determines the regulated movements in property rates costs and capital investment ‘revenue requirement’. This is calculated as the sum of all our risk in early phases of maturity. forecast costs (including operating expenditure, the required return using the cost of capital determined by the CAA on the forecast RAB and regulatory depreciation) less projected non- aeronautical revenue. The resulting revenue requirement is divided by forecast passenger numbers to produce the per passenger maximum allowable yield. FINANCIAL STATEMENTS

14 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 OUR BUSINESS (CONTINUED) STRATEGIC REPORT

ASSETS

REGULATORY ASSET BASE F (EXISTING AND NEW CAPITAL INVESTMENT) PASSENGER FORECAST

CALCULATED E / F WITH WACC

COSTS INCOME CHARGES

B C D E G RETURN ON OPERATING REGULATORY REQUIRED AERONAUTICAL INVESTMENT COMMERCIAL COSTS DEPRECIATION REVENUE CHARGES CAPITAL REVENUES

Building blocks for maximum allowable yield calculation

2019 REGULATORY DEVELOPMENTS term regulatory certainty. It also signalled that it will use the most up to date information from the Competition and In November, the CAA extended our economic licence until Markets Authority regarding the National Air Traffic Services the end of 2021 to better align the next regulatory period ‘(NATS)’ En-route Limited (NERL)’s case when defining the (H7) with the overall expansion timetable and related WACC for H7. statutory process. The period encompassing 2020 and 2021 GOVERNANCE REPORT is known as Interim H7 (iH7). A Commercial Airline SUMMARY OF CURRENT REGULATORY AND Agreement defining the rebate on aeronautical charges LEGAL CHALLENGES TO EXPANSION that will be applicable during iH7. This agreement is reflected in the extended licence. The publication of the CAA policy document (December 2019) on the early design and construction costs associated with The agreement is built by overlaying fixed and volume-based expanding Heathrow – category B and early category C costs – rebates onto an extension of the existing RPI-1.5% price path represents further progress towards providing the regulatory and regulatory framework. The deal aims to incentivise airlines certainty necessary to deliver an expanded Heathrow. We are to maximise the use of current congested capacity ahead of concerned though that some proposals do not represent a new capacity being released. balanced set of incentives needed for investment. This was Later in December, we submitted our Initial Business Plan (IBP) reflected in our response to the consultation that was submitted to the CAA. Expansion will unlock material reductions in in March 2020. A final decision and policy statement from the airfares by injecting airline competition and choice. The plan is CAA is expected later in 2020. sustainable, affordable, financeable and deliverable and sets On 27 February 2020, the Court of Appeal concluded that the out our aspirations to offer what we understand consumers Government was required but failed to take account the Paris want while addressing the constraints from our other key Climate Agreement when preparing the Airports National Policy stakeholders including our airline partners, local communities, Statement (‘ANPS’). The Court declared that the ANPS has no colleagues and investors. Through engagement, we have legal effect unless and until the Government carries out a review identified two bookend options contrasting cost and service. of the policy. The first option prioritises savings by releasing additional capacity faster while the second option prioritises service with The Government declined to appeal to the Supreme Court more emphasis on rail and service improvements. Through directly, but Heathrow and other interested parties have applied expansion, it is estimated that airfare savings could be for permission to appeal the Court of Appeal ruling. FINANCIAL STATEMENTS between £21 to £142 per ticket depending on which option is Heathrow has already taken a lead in getting the UK aviation chosen. Our plan also proposes an evolution to the regulatory sector to commit to a plan to get to Net Zero emissions by 2050, framework by extending the price control period to 15 years. in line with the Paris Agreement, and we are ready to work with The longer horizon aims to balance predictability, risk and Government to achieve this. Expanding Heathrow remains a flexibility. We propose fixing the cost of equity for the key part of our long-term strategy once we have beaten duration of the price control while implementing periodic or COVID-19 and entered the recovery phase. However, given the performance-based resets for some building blocks such as current COVID-19 crisis and the ongoing appeals process, we passenger forecasts, operating expenses and commercial expect expansion and related capital investment to be delayed revenue to ensure creditors don’t take additional risk. by at least two years. COVID-19 is discussed in further detail in Feedback on our IBP is being collected from the Consumer our outlook on page 20 and in Heathrow’s Q1 results which can Challenge Board, our airline partners and other key be found on our website. stakeholders at the time of this report. This feedback will be We have concluded expansion is probable and therefore it is reflected in our Final Business Plan (‘FBP’) due to be published appropriate to have recognised £450m of spend to date as an in the second half of 2020. asset in the course of construction. If our appeal is unsuccessful, Lastly, in January 2020 the CAA published a further a reassessment of the probability of expansion occurring would consultation on the regulatory framework and financial issues take place. If the likelihood of expansion occurring were no related to H7. The CAA outlines the importance of setting longer considered probable, the expansion related capital price control arrangements that are consistent with our credit investment incurred as of the date of reassessment would be rating commitments and the importance of providing longer required to be impaired and expensed to the income statement.

ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 15 OUR BUSINESS STRATEGIC REPORT (CONTINUED) £162m P £22m E £239m O £423m O

£78m O

£125m C

£113m £2,976m O £722m T R £1,831m £64m A C GOVERNANCE REPORT

£342m R

GENERATING REVENUE Landing charges, levied for substantially all aircraft (with certain diplomatic and other flights being exempted). We generate two primary types of income: aeronautical These are calculated in accordance with the certified income, which is generated from fees charged to airlines for maximum take-off weight, and adjusted, where applicable, use of the airport’s facilities, and retail and other income from in accordance with each aircraft’s noise-rating, emissions and a variety of other sources. the time of day. Incentives are provided for quiet, and clean, aircraft. Airlines pay a penalty for movements in the core night AERONAUTICAL INCOME period (23.30-06.00). FINANCIAL STATEMENTS Aeronautical income reflects the fees charged by Parking charges, levied for each 15-minute slot after 30 and Heathrow to the airport’s airline customers. The tariff 90 minutes (narrow and wide-bodied aircraft respectively). structure can vary in consultation with stakeholders, but includes three key elements: RETAIL AND OTHER INCOME Passenger charges, based on the number of passengers The ‘Single Till’ means that higher retail and other income per aircraft, and levied in respect of all departing passengers. reduces per-passenger charges. Retail and other income is There is no charge for crew members. Charges vary by route generated from a variety of sources. These include: area (European, domestic and rest-of-world) and type (transfer and non-transfer passengers). • Concession fees from retail operators. • Direct income from car parks, advertising revenue and premium products. • The rental of airport property space such as aircraft hangars, warehouses, cargo storage facilities, maintenance facilities, offices and airline lounges. • The provision of facilities such as baggage handling and passenger check-in. • Fare revenue from the Heathrow Express rail service.

16 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 17 OPERATING REVIEW

JOHN HOLLAND-KAYE Chief Executive Officer

18 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

REVIEW OF THE YEAR 2019 HIGHLIGHTS 2019 marked the end of a transformational decade for Heathrow as we welcomed a record 80.9 million passengers. Our traffic grew by nearly 25% in the past ten years and we 80.9m significantly enhanced our passenger experience despite being Nine years of consecutive passenger growth severely capacity-constrained. Over £12 billion of private money made all of this possible. We invested in our colleagues, in better facilities, better processes and resilience. We have also taken a leading role in tackling one of the £3.0bn Revenue up 3.5% on last year biggest challenges of our times: climate change. All of this paid off for our passengers and has earned us a place among GOVERNANCE REPORT the best-rated airports in the world today. This is a position of which we can be proud but cannot take for granted. To 210 continue delivering our vision and give passengers the best Colleagues promoted airport service in the world, we need to expand Heathrow. The last decade was pivotal in that process: we won the parliamentary vote for Heathrow expansion, we are finalising our Masterplan and we continue working with our regulator, 1,648 airline partners, local communities and investors to deliver Colleagues attended managerial skills training this once-in-a-generation project. Zooming into 2019, we continued progressing on all four strategic priorities underpinning our vision to give passengers 4.17 the best airport service in the world: making Heathrow a Passenger satisfaction (ASQ) great place to work, transforming customer service, beating the business plan and sustainable growth. Our colleagues are fundamental to the success of our vision, 2019 was our ninth consecutive year of passenger growth which is why making Heathrow a great place to work and as we welcomed 80.9 million passengers through the only creating careers where people can fulfil their potential remains hub airport in the world’s largest aviation market, up 1.0% at the very heart of our strategy. In the last 12 months, 1,648 compared to 2018. We continued to beat the plan with £3.0 colleagues (2018: 755) attended training to advance their billion revenue, up 3.5% on last year. Operating costs managerial skills and 210 colleagues (2018: 263) were remained tightly controlled whilst gearing up for growth. We continued to prioritise safety, security, service and resilience. promoted. 1,093 apprenticeships were created as we FINANCIAL STATEMENTS progressed on our goal to deliver 10,000 apprenticeships by This drove a 5.0% increase in adjusted operating costs per 2030. Since becoming a fully accredited London Living Wage passenger. Our adjusted EBITDA rose 2.0% to £1.8 billion as employer in 2017, we continued making progress with our a result. We raised £2.1 billion of debt financing globally in direct supply-chain colleagues: 64 contracts out of 108 have 2019 including a 15-year €650m bond issuance and our now been updated. Overall, 74% of our colleagues (2018: inaugural JPY transaction in December. Financing activities 73%) agreed that Heathrow is a great place to work. highlighted global investors’ continued confidence in Heathrow’s credit and kept cementing strong financial Investments to transform customer service delivered successful foundations ahead of expansion. results too. We achieved an all-time high 4.17 out of 5.00 score in the global Airport Service Quality (ASQ) survey over We contribute proactively in the delivery of the UN 2019. We also achieved some of the highest levels of baggage Sustainable Development Goals by 2030 and have achieved connections and departures punctuality in our history. For the significant milestones to grow Heathrow sustainably today fifth year running, Heathrow was named ‘Best Airport in and in the future. We made further progress on decarbonising Western Europe’ as well as ‘Best Airport for Shopping’ for the the airport’s infrastructure: in January 2020 we became tenth year in the most recent Skytrax World Airport Awards. carbon-neutral. We are working towards operating zero- carbon airport infrastructure by the mid-2030s, and have shared our plan to play our part in decarbonising the aviation industry over the coming decades. We were delighted to see our achievements recognised by edie’s ‘Mission Possible: Sustainable Business of the Year’ award.

ANNUAL REPORT AND ACCOUNTS 2019 19 OPERATING REVIEW (CONTINUED)

KEY MANAGEMENT CHANGES Management changes this year include Fidel Lopez resigning as a Non-Executive Director of the Board on 30 January 2019. He was replaced by Maria Casero on the same date. RT Hon Ruth Kelly was appointed as a Non-Executive Director of the Board on 8 April 2019. Rachel Lomax stepped down from the HAHL Board on 23 February 2020, having served just over nine years on the Board. Stuart Birrell resigned as Chief Information Officer and from the Heathrow Airport Limited Board on 17 March 2020.

OUTLOOK The spread of COVID-19 represents a material challenge for the global aviation industry. The pandemic has had a material impact on our operations and Heathrow’s financial performance 2020 will be significantly impacted. In response to COVID-19 we have taken immediate action to safeguard Heathrow’s financial resilience including temporarily shrinking our operation to a single runway in Terminals 2 and 5, cancelling executive pay, a companywide pay reduction and bonus cancellation, freezing recruitment and removing all non-essential costs. From March 2020 COVID-19 has materially impacted our trading results, passenger numbers were down by 52% in March 2020 and by 97% in April. Management have considered the impact that COVID-19 will have on our 2020 trading results. However, uncertainty around how long the pandemic will last and its medium to long term effect on the aviation industry, means that the financial impact cannot be estimated with any degree of accuracy in the long term at this time. We will continue to monitor the situation over the coming months and will provide updates in our quarterly results and semi-annual investor report.

JOHN HOLLAND-KAYE Chief Executive Officer

20 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 21 OUR STRATEGY

Our vision is to give passengers the best airport service in the world.

HEATHROW’S STRATEGIC FRAMEWORK Who we are What we want How we are Our strategic framework ensures that Our Strategic Brief sets out our our purpose is at the heart of what we high-level aspirations for the future going to achieve it of Heathrow for all our strategic do. It reminds us of our priorities and Our Masterplan is our long-term, values which reflect a simple business stakeholder groups. Our Client Brief translates the aspirations for our high-level development plan logic: engaged people deliver excellent agreed with our stakeholders. Our service. Excellent service is our stakeholder groups held in the Strategic Brief into specific requirements. Management Business Plan contains differentiator that makes passengers the actions and resources we need to more likely to choose Heathrow again. deliver our strategy. Our Initial and Final Business Plan reflects consumers views and provide the plan and building blocks for the next regulatory period.

MASTERPLAN - VISION MANAGEMENT PURPOSE STRATEGIC BRIEF (INTERNAL) PRIORITIES CLIENT BRIEF INITIAL/FINAL VALUES BUSINESS PLAN (REGULATORY)

WHO WE ARE WHAT WE WANT HOW WE ARE GOING TO ACHIEVE IT

22 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

VISION To give passengers the best airport service in the world

PURPOSE Making every journey better

T R E

A C PRIORITIES I N V S S R U F H O E S T S B T R R E A W M E A AN IN O MOJO CUSTOM T THE PL ABLE GR

WHO WE ARE

GOVERNANCE REPORT

C E

A E G T P K E I S I E V E N E C F I E G R IN P A V I S E H G R N V T E G NE E I EX S EVERYO RYONE W CELLENT VALUES

D I M O G W Y R P A I N O E R N I R H O D G H K T V Y T T ING TOGE ING EVER HE RIGHT

Our high-level aspirations for the future of Heathrow for all our STRATEGIC BRIEF strategic stakeholder groups WHAT WE WANT Translates the aspirations for our stakeholder groups held in the CLIENT BRIEF Strategic Brief into specific requirements

MASTERPLAN The long-term plan for the layout of an expanded Heathrow HOW WE ARE GOING TO MANAGEMENT The consumer outcomes, action and resources we need to deliver ACHIEVE IT AND INITIAL/FINAL our strategy including over the next regulatory period

BUSINESS PLAN FINANCIAL STATEMENTS

ANDREW MACMILLAN Chief Strategy Officer

ANNUAL REPORT AND ACCOUNTS 2019 23 OUR STRATEGY (CONTINUED)

Our priorities explained Our values explained

MOJO KEEPING EVERYONE SAFE

To be a great place to work, we will help K We look after everyone. We never compromise on E E E F P A IN S G NE MOJO our colleagues fulfil their potential and work EVERYO safety or security and do the job properly first time, together to lead change across Heathrow every time. We’re committed to safety as the with energy and pride. foundation of an efficient operation and a secure airport. We know safety and security are essential

TRANSFORM CUSTOMER SERVICE for a great passenger experience.

T R E

A C

I N V To deliver the world’s best passenger S R F O E S R R TREATING EVERYONE WITH RESPECT M E

CU OM experience, we will work with the Heathrow ST T

C E

A E

T P community to transform the service we give to S We celebrate diversity and respect others. I N E G R E H VE IT passengers and airlines, improving punctuality RYONE W We’re friendly, polite and considerate. We value and resilience. everyone’s contribution. We support our people so they can care for others. BEAT THE PLAN To secure future investment, we will ‘beat GIVING EXCELLENT SERVICE

B E A AN G T L E THE P the plan’ and deliver a competitive return to I We put a great passenger experience at the heart V C I I N V G R E EX S shareholders by growing revenue, reducing CELLENT of what we do. We take time to understand what costs and delivering investments efficiently. our passengers and our airlines really want. We are the best we can be and deliver what we promise. SUSTAINABLE GROWTH To grow and operate our airport sustainably, WORKING TOGETHER S U H S T T A W IN O ABLE GR now and in the future. We’re one airport team. We develop excellent W R O E R K TH ING TOGE working relationships and bring out the best in each other. We work constructively with each other and our airlines, partners and local communities. We look for win-win outcomes that benefit Heathrow and our partners.

IMPROVING EVERY DAY We aim higher. We all play our part in achieving I M Y P A R O D V Y ING EVER great financial results. We always look to keep things simple, reduce costs and improve efficiency. We regard every pound spent as if it were our own.

DOING THE RIGHT THING

D We’re honest, open and fair, and act with integrity. O G IN IN G H T T HE RIGHT We’re responsible in the way we do business. We challenge the status quo, tell it like it is and speak out if we have a concern. We have the tough conversations, make the right decisions, stand by our word and do what we say we will.

24 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

OUR STAKEHOLDER GROUPS The strategic framework also sets our aspirations for The full Strategic Brief can be found on our website at: each of the five strategic stakeholder groups (passengers, https://www.heathrow.com/company/about-heathrow/ colleagues, airlines, investors, UK communities and company-information/heathrows-strategic-brief environment) and the key components of our Heathrow Ecosystem (statutory authorities, supply chain and commercial partners).

R O W E C O S Y T H S T E A E M GOVERNANCE REPORT H

PASSENGERS:

TO GIVE

COMMUNITIES AND

PASSENGERS THE ENVIRONMENT:

BEST AIRPORT A GREAT PLACE

SERVICE IN THE

TO LIVE

WORLD

S C

O I CONNECTING

I ALL OF THE UK M

R INVESTORS: O

DELIVER TO GLOBAL E

H COLLEAGUES:

C T GROWTH

COMMERCIAL A GREAT PLACE

I U

RETURNS THAT A

A TO WORK FINANCIAL STATEMENTS

SUPPORT Y

P R

INVESTMENT A

AIRLINES: R

T T

N U PROMOTE AIRLINE

T E

A SUCCESS THROUGH R

S S AFFORDABILITY

S U P P L Y C H A I N

ANNUAL REPORT AND ACCOUNTS 2019 25 OUR STRATEGY (CONTINUED)

PERFORMANCE AGAINST STRATEGIC PRIORITIES

MOJO We want everyone to go home safe and well to their loved ones. In 2019, our lost-time injuries metric was broadly stable We want Heathrow to be a great at 0.34 (2018: 0.33). Targeted action plans are in place to place to work. We provide an drive down injuries such as sharps-related injuries and those environment where colleagues feel sustained while searching vehicles at control posts. safe, proud, motivated and enjoy what they do. In 2019 74% (2018: We have recently agreed a pay deal with our unions. The deal 73%) of colleagues agreed Heathrow secures stable and fair terms and conditions for our colleagues MOJO is a great place to work through our until 2022 while remaining competitive. Mini Pulse survey. We continued building strong leadership capability in 2019, 210 colleagues (2018: 263) were promoted and 1,648 colleagues (2018:755) attended training and development programmes.

We delivered...... and we will do more

• Awarded a £10m share in success pay-out to front • Transition 100% of suppliers to London line colleagues. Living Wage. • Provided 1,648 colleagues with managerial • Invest in our future workforce through skills training. apprenticeships. • Continued progress on moving our direct supply chain to London Living Wage. • Set up the Colleague Engagement Forum, empowering colleagues across the business to help make Heathrow a great place to work. • Awarded Disability Confident Leader status. • Created a cancer support network.

PERFORMANCE INDICATORS Lost-time Injuries1

2019 0.34

201 0.33

201 0.48

Colleague engagement1

2019 74%

201 73%

201 74%

1 Number of lost-time injuries for every 100,000 hours worked (Lost-time injuries); mini-Pulse colleague survey results (Colleague engagement).

26 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

TRANSFORM CUSTOMER In 2019, we achieved a record ASQ rating of 4.17 out of SERVICE 5.00 (2018: 4.15) compared to 3.84 out of 5.00 in 2010. In addition, 82% of passengers surveyed rated their Heathrow

T We continue to deliver strong levels experience ‘Excellent’ or ‘Very good’ (2018: 82%). These R E

A C of service across our passengers’ scores illustrate not only the strength and resilience of our I N V journey. Our service standards S R operations but also the benefits of our continued investments. F E O S remain high, despite passenger growth For instance, passengers are enjoying upgraded Wi-Fi facilities R M ER putting pressure on some key processes and a transformed immigration experience as a result of CUSTOM such as check-in, security, immigration, newly installed e-Gates. Closure of the cargo tunnel caused and baggage. connections satisfaction to decline to 4.14 out of 5.00 (2018:4.16). GOVERNANCE REPORT

We delivered...... and we will do more

• Received Skytrax award for the ‘Best Airport in • Roll-out of end-to-end biometrics. Western Europe’ and ‘Best terminal in the world’. • Wider roll-out of advanced CT security scanners. • Installed anti-drone systems. • Upgraded the airport to superfast Wi-Fi. • Installed new immigration e-Gates. • Launched new routes increasing domestic connectivity (eg Newquay, Guernsey, Isle of Man). • First full year of our Service Signatures programme which seeks to improve customer service.

PERFORMANCE INDICATORS Passenger satisfaction (ASQ)2 Baggage connection2 2019 99.0% 2019 4.17 FINANCIAL STATEMENTS

201 4.15 201 98.8%

201 4.16 201 99.0%

Departure punctuality2 Connections satisfaction (QSM)2

2019 78.5% 2019 4.14

201 77.6% 201 4.16

201 80.2% 201 4.16

Security queuing2

2019 96.3%

201 96.8%

201 97.3%

2 Airport service quality (ASQ); percentage of flights departing within 15 minutes of schedule (Departure punctuality); percentage of passengers passing through central security within five-minute period (Security queuing); percentage of connecting bags travelling with our passengers (Baggage connection): quality of service monitor (QSM).

ANNUAL REPORT AND ACCOUNTS 2019 27 OUR STRATEGY (CONTINUED)

BEAT THE PLAN per passenger aircraft also increased to 213.7 (2018: 213.4) driven by aircraft upgrades on European and Middle Eastern routes throughout the year. NEW INTERCONTINENTAL ROUTES Intercontinental traffic grew by 2.2%. Intercontinental growth New routes were announced to North continues to be driven by North America, through increased B E America by British Airways: Pittsburgh load factors and frequencies, additional services and new A AN T THE PL and Charleston. British Airways also routes such as Pittsburgh and Charleston. Africa traffic also announced new routes to Kansai, grew strongly due to additional services to Marrakesh, Dammam and Valencia. We also had new routes announced Seychelles, Durban and Johannesburg. Middle East traffic to Bali from Garuda Indonesia and Sialkot from Pakistan increased due to larger aircraft and increased load factors. International Airline. Asia Pacific traffic declined due to Jet ceasing operations early in the year. Short-haul traffic declined slightly by 0.3% driven by European traffic with a number of carriers reducing RECORD PASSENGER TRAFFIC services. Domestic traffic grew 0.9% with new routes to During 2019, we welcomed 80.9 million passengers, Newquay, Guernsey and Isle of Man. an increase of 1.0% (2018: 80.1 million) and our ninth consecutive year of record passenger traffic. Aircraft continue Our cargo volumes declined 6.6% compared to 2018 to fly fuller, with load factors increasing to the highest we reflecting the general weakness in the global market in 2019. have ever seen at 80.0% (2018: 79.4%). Nevertheless one in Our cargo operation reached capacity in 2018 and we do not five seats remain empty, which provides a significant growth expect volumes to increase materially until the capacity opportunity prior to expansion. The average number of seats constraints are resolved by expanding Heathrow.

We delivered...... and we will do more

• Agreed commercial airline deal which incentivises • Submit our Final Business Plan. load factor. • Prepare the business for growth referred to as • Grew passengers numbers to 80.9 million. ‘Project Magenta’. • Submitted our Initial Business Plan to CAA which • Seek further cost efficiencies and benefit from the covers a 15 year price control period. economies of scale which come from growth. • Re-launched Heathrow.com and a new digital led shopping experience.

Passengers (millions) 2019 2018 Var. % Key traffic 2019 2018 Var. % performance indicators UK 4.8 4.8 0.9 Passenger ATM2 473,233 472,744 0.1 Europe 33.2 33.3 (0.5) Load factors (%) 2 80.0 79.4 0.7 North America 18.8 18.1 4.1 Seats per ATM 213.7 213.4 0.2 Asia Pacific 11.4 11.5 (1.1) Cargo tonnage (‘000) 1,587 1,700 (6.6) Middle East 7.8 7.7 1.2

Africa 3.5 3.3 5.3 PERFORMANCE INDICATORS3 Latin America 1.4 1.4 2.3 Adjusted EBITDA £m 1 Total passengers 80.9 80.1 1.0 2019 1,828m

201 1,792m 1 Calculated using unrounded passenger figures. 2 Passenger air-traffic movements (ATM) includes commercial flights including scheduled, chartered and cargo and excluding positioning and private flights; load 201 1,752m factor is a percentage of seats filled by passengers. 3 Further analysis can be found in the Financial Review on page 51.

28 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

SUSTAINABLE GROWTH Heathrow 2.0 is our sustainability strategy. It represents a step-change for our business and captures the momentum of an industry-wide shift towards a sustainable future for S U H aviation. Heathrow 2.0 and performance indicators for S T T A W sustainable growth are discussed in detail in the following IN O ABLE GR section on pages 30 to 47.

We delivered...... and we will do more GOVERNANCE REPORT

• Launched Way2Go a new initiative to cut colleague • World’s first airport Ultra Low Emission Zone plans. car use. • 2019 Sustainability Report to be published. • Became the first airport to be a certified sustainable • Investment in UK natural climate solutions. fish airport. • Added new bus and coach routes. • Engaged in statutory Masterplan and Airspace Change consultations. • Achieved carbon-neutral airport infrastructure.

SUSTAINABILITY HERO

JASVINDER GILL SECURITY MANAGER “I formed ‘The Sustainability Squad’ - group of campus security colleagues committed to making

a difference. We’re looking to introduce reusable FINANCIAL STATEMENTS alternatives to single use plastic cups and coffee cups at Campus.”

ANNUAL REPORT AND ACCOUNTS 2019 29 OUR COMMITMENT TO SUSTAINABLE GROWTH

SUSTAINABILITY REPORT In this report we have included 2019 progress against a selection of our 10 flagship goals (the key targets and aspirations from Heathrow 2.0). Our full report on progress and challenges across all 10 flagship goals and 12 objectives of Heathrow 2.0 will be published later in 2020. Our Sustainability Reports are available at www.heathrow.com.

SUSTAINABLE DEVELOPMENT GOALS The United Nations’ Sustainable Development Goals (SDGs) were launched in 2015. They are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. To show how our commitments within Heathrow 2.0 support the 17 goals, we have summarised which goals apply to each of the four pillars CAROL HUI within this report. Chief of Staff and General Counsel SUSTAINABILITY CULTURE Heathrow expansion will connect all of Britain to global We have embedded sustainability into our culture through a growth, putting it at the heart of the global economy for Leading Sustainable Growth programme for managers and generations to come. through our governance structures to drive progress on our targets. We are also integrating sustainability into the But this cannot be achieved at any cost. We need to grow management of each department to help make it part of sustainably – delivering the global connections that Britain our culture across Heathrow. Key aspects include: needs while having a positive impact on local communities and helping to decarbonise the aviation industry. This is what • HAHL Board of Directors1: Our Board receives monthly our customers and colleagues expect. written updates on sustainability performance and risks, and in addition discusses proposed new targets and plans. Heathrow 2.0 is our plan for sustainable growth. It sets out The HAHL Board1 also has a dedicated sub-committee how we will improve life for colleagues and communities, which discusses sustainability issues quarterly: the contribute to a thriving economy, and help to tackle global Sustainability and Operational Risk Committee. challenges including climate change. It supports the ambitions set out in our Initial Business Plan and will help us meet the • Executive team: Our Chief Executive and the Executive expectations of our stakeholders, maintain support for our leadership team provide strategic direction for the delivery expansion and retain our licence to operate while reducing of Heathrow 2.0 through their functions. The Executive environmental and social risks to our business. team reviews progress against our flagship goals monthly. • Our Sustainability Leadership Team: Ensures that HEATHROW 2.0 STRATEGY OVERVIEW Heathrow 2.0 is embedded and implemented across the business. Its members are senior departmental leaders. Our plan has four pillars, underpinned by 12 objectives and a range of goals and indicators. It covers our own business as • Functional leadership: Each Heathrow function has a well as our role in driving change across the wider industry. It senior sustainability lead, selected from the leadership team shows how we aim to go beyond mitigation and deliver and accountable for delivery of the department’s annual positive impacts that enable us and those around us to thrive. sustainability improvement plan.

In February we were delighted to receive edie’s 2019 Mission Possible: Sustainable Business of the Year Award in recognition of our Heathrow 2.0 efforts so far. We were also shortlisted as a finalist for the Business in the Community Responsible Business of the Year 2019 award which recognises businesses taking pioneering steps in sustainability.

1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 78.

30 ANNUAL REPORT AND ACCOUNTS 2019 A GREAT PLACE TO WORK A GREAT PLACE TO LIVE STRATEGIC REPORT

1. Safe and well. A place where everyone can get to 4. Respite for residents. A place that’s getting quieter. their destination and return home, safe and well. 5. Quality air, locally. A place where local air improves. 2. Careers, not just jobs. A place where anyone can 6. Sustainability communities. A place where local reach their potential. people shape their future. 3. Culture of sustainability. A place that lives and breathes sustainability. Heathrow 2.0: 2019 Achievements • Announced the world’s first airport Ultra Low Emission Heathrow 2.0: 2019 Achievements Zone (ULEZ) to be introduced in 2022 to discourage • There were 1,093 apprenticeships starting in 2019 older, more polluting passenger cars and private hire (exceeding our target of 400). 175 were facilitated vehicles from using the roads around Heathrow, through the Heathrow Academy. improving air quality and reducing congestion. • Increased the percentage of women in senior • Launched Way2Go, a new colleague initiative to help management from 33% to 35% and increased all Team Heathrow colleagues find cheaper, smarter,

the percentage of colleagues from black, Asian healthier and greener ways to get to work including GOVERNANCE REPORT and minority ethnic (BAME) backgrounds in senior car sharing, public transport, cycling and walking. management from 15% to 17%. • The latest noise contour report showed a continued • Raised awareness with colleagues and local schools reduction of the overall noise levels with the smallest to celebrate the gifts, talents and employability of ever noise footprint (note the most recent available people with neuro-developmental conditions. report is from 2018).

A THRIVING SUSTAINABLE ECONOMY A WORLD WORTH TRAVELLING

7. Connecting the UK. A place that provides a 10. Zero-carbon airport. A place that is run on gateway hub for the UK to the world, and the world renewable energy and delivers zero waste. to the UK. 11. Accelerating the era of sustainable flight.

8. The next economy. A place that nurtures small and A place where innovators work together to deliver FINANCIAL STATEMENTS medium sized businesses and social enterprises. carbon-neutral growth. 9. Sustainable supply chain. A place that drives 12. Responsible gateway. A place that strives to end change throughout our supply chain. trafficking of people and wildlife.

Heathrow 2.0: 2019 Achievements Heathrow 2.0: 2019 Achievements • 64 out of 108 contracts were amended to ensure • In 2020, Heathrow became carbon neutral by workers in our supply chain receive the London Living offsetting our 2018 emissions for the energy used Wage, exceeding our target of 49. Over an estimated in our terminals. 1,300 Team Heathrow colleagues benefited from a • Enabled over £500,000 of investment in sustainable salary uplift as a result. innovation projects through direct and partnership • Delivered the third ’World of Opportunity’ SME grant funding via our Heathrow Centre of Excellence for scheme, awarding £40,000 in vital seed money to 20 Sustainability. firms to fund international trade missions and foreign • Trialled new technology to help turn unrecyclable market research. plastic waste into low-carbon fuels. • Became the world’s first Sustainable Fish Airport, with all retail business partners at Heathrow adopting a sustainable fish buying policy. This covers four million meals per year.

ANNUAL REPORT AND ACCOUNTS 2019 31 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) A GREAT PLACE TO WORK

We believe the places we work should DIVERSITY AND INCLUSION We have a flagship goal to reflect local diversity at every level provide people with opportunities. by 2025 so that we can become a truly great place to work whilst helping local people find careers that can fulfil their We want everyone who works here to potential. During 2019 we agreed a strategy to meet this feel they can be happy, motivated and ambitious goal and we are putting in place actions and measures to progress this. developed in ways which encourage Our diversity networks help us promote an inclusive culture them to flourish. through events, fundraising and awareness campaigns. They include: Proud, our LGBT+ network; HAND, Heathrow Airport’s Network for Disability; en-haNCE our culture and 2019 1,093 ethnicity network; and Altitude, our gender equality network. Each network has an executive sponsor who acts as mentor 2019 400 and supports the successful implementation of network projects. Network meetings are regularly attended by our 1 310 201 CEO and members of our Executive team. Total Team Heathrow number of apprenticeships2 Our 2019 gender pay gap report shows our gap is below the national average. Our mean gender pay gap is 9.8% 2019 175 (compared to 10.5% in 2018) and our median pay gap is 3.0% (compared to 0.6% in 2018). We are making progress 2019 150 to address our gender pay gap, in particular improving female representation in more senior, higher paid roles, by recruiting 201 159 and promoting women into these roles. We have progressed, but there is still more to do. 7% 201 Number of apprenticeships arranged through While we’re proud of these improvements, we are aware that the Heathrow Academy3 womenAL and colleagues from19% black, AsianFemale and 2019 minority4 ethnic (BAME) backgrounds remain under-represented in our senior CAREERS, NOT JUST JOBS leadership, accountingX% for 35%AE and 201 17% respectively of the Flagship goal: 10,000 apprenticeships by 2030 to help people most senior roles in 2019. Addressing this is a priority and our develop skilled and sustainable careers. approach is summarisedX% in ourBAME Sustainability 2019 Report. Apprenticeships play an important role in building the UK’s skills base. To help us achieve our goal of 10,000 Female 2019 35% apprenticeships by 2030, we launched and funded a shared apprenticeship scheme with our construction supply chain in S 201 33% early 2019. A first for a UK airport, this will allow apprentices at Heathrow to establish a broad range of skills and 17% BAME 2019 experience by working with multiple companies to complete their apprenticeship. We also launched a skills partnership to 15% AE 201 offer over 80 apprenticeship qualifications. 918 apprenticeship starts were independently facilitated by Female 2019 43%6 Team Heathrow companies in 2019. These were mainly delivered through a new cabin crew apprenticeship A 201 43% programme that began in 2019. 175 people started their C apprenticeships through the Heathrow Academy during 2019. BAME 2019 43% This included 55 apprenticeships with Heathrow Airport Ltd, 29 through the shared apprenticeship scheme and 91 with AE 201 42% Team Heathrow companies, facilitated through the Heathrow Academy. This brings the total number of apprenticeship starts to 1,093, far exceeding our target of 400. Heathrow is developing an apprenticeship delivery plan that will highlight the required number of apprenticeships, in what areas, the level of qualification and when these will be required to meet our goal of 10,000 apprenticeships by 2030.

32 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT

This display installed at Heathrow Terminal 5 in partnership with the ADHD Foundation raised awareness of hidden disabilities such as attention deficit hyperactivity disorder (ADHD), autism, dyslexia, dyscalculia and dyspraxia. It supported a wider education programme with local schools to celebrate the gifts, talents and employability of people with neuro-developmental conditions. FINANCIAL STATEMENTS

PAULA STANNETT Chief People Officer

1 We have restated our data for 2018 which was previously reported as 159 to include additional apprenticeships by Team Heathrow companies 2 This now reflects additional apprenticeships reported by Team Heathrow companies that were not included in the 2018 Sustainability Report 3 Measured by number of apprenticeship starts 4 Executive to band C 5 All directly employed colleagues of the Heathrow Airport Holdings Limited Group as defined on page 78. 6 Calculated from total number of colleagues employed by Heathrow Airport Holdings Limited during 2019. The gender pay gap reports 42% which represents colleagues employed at April 2019.

ANNUAL REPORT AND ACCOUNTS 2019 33 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) A GREAT PLACE TO LIVE

We want to be a responsible neighbour that benefits our by public transport by 2030, so local areas can thrive without local community. We’re working with airlines and other increased congestion. We will report on progress in our partners to reduce the impact of noise and emissions from next Sustainability Report. Heathrow and to support projects that improve quality of life In May, we announced the world’s first airport Ultra Low around the airport. Emission Zone (ULEZ). From 2022, the Heathrow ULEZ will discourage older, more polluting passenger cars and private RESPITE FOR RESIDENTS hire vehicles from using the roads around Heathrow through Flagship goal: Halve the number of fights on non-disrupted charges, improving air quality and reducing congestion. It’s days which operate late after 23.30 the first step towards a wider Vehicle Access Charge (VAC) scheme that will be introduced in the future. 2019 257 The money raised through the ULEZ will help fund measures 2019 219 to improve sustainable transport modes and public transport access as part of our expansion. 201 268 We also have a goal to cut colleague car trips by 25% by 2030. In October 2019 Heathrow launched a new colleague Late-running aircraft1 campaign, Way2Go, to help all Team Heathrow colleagues To reduce noise disturbance, we incentivise the use of quieter find cheaper, smarter, healthier and greener ways to get to aircraft and quieter operational procedures, and we work to work whether that’s car sharing, public transport, cycling or reduce late-running flights at night. We did not meet our walking. Nearly 2,000 colleagues signed up to receive updates 2019 target due to the influence of factors such as increased on sustainable travel options and we met with 25 of the air traffic across Europe, air-traffic control resourcing largest Team Heathrow companies to discuss how we can challenges, weather, aircraft technical issues delaying work together to change commuting behaviours. departures as well as capacity restrictions across multiple The campaign helps Heathrow to meet our external Airports air-traffic sectors. We have made progress towards our end National Policy Statement (ANPS) targets as well as helping goal, which is to at least halve the number of flights, to 165, colleagues save money, cut their carbon footprint and boost that operate after 23.30 on non-disrupted days. In 2019, 257 their physical and mental wellbeing – whether it’s for one flights departed after 23.30 which was a 4% improvement on journey a month or the last mile every day. 2018. In 2019 there were 119 nights with no flights, arrivals or departures between 23.30 and 04.30 (2018: 115). In 2019 we To improve the public transport options for colleagues, we changed the landing noise fee so that it has been divided into have delivered, in partnership with operators, new routes. landing and departure noise fees. Airlines now pay a factor of These include the RA2 to Guildford, the X442 shuttle five penalty for movements in the core night period (23.30- between Staines and Terminal 5, an extension of the 102 06.00). which restores direct connections to Buckinghamshire and launched the 459 serving Iver, Langley and Colnbrook. The Heathrow ‘Fly Quiet and Green’ quarterly league table, recognises the best-performing airlines for noise and To tackle emissions from airside activities, we will establish an emissions, and encourages improvement. The results show airside ultra-low emissions zone by 2025. We have consulted that 60% of movements were by aircraft in the quietest with our airside partners on the standards that we’ll require chapter and under 1% in the noisiest chapter, demonstrating from vehicles in 2025. airlines are swapping in newer, quieter and more efficient aircraft to their fleets, and improving how they fly to SUSTAINABLE COMMUNITIES Heathrow to decrease noise and emissions. We aim to have a positive impact on the communities around Heathrow, supporting projects that make local areas better QUALITY AIR, LOCALLY places to live. We’re working to improve air quality for the communities Our Princes Lakes site, for example, includes over 100 acres of around Heathrow through our Emissions Strategy and Action woodland and lakes. We have been improving habitats for Plan. This commits us to: improve efficiency and minimise fuel wildlife on the site through working with the Surrey Wildlife use; employ the latest technologies; and use our size and Trust grazing programme and local Scouting and Beaver scale to encourage others to act. groups. In recognition of this work, the site received a Road vehicles are the main source of local air pollution. Biodiversity Legacy Award in 2019 from the Construction We have a goal of 50% of airport passenger journeys made Industry Research and Information Association (CIRIA). Heathrow also received the Wildlife Trust’s benchmark award for the 12th year running. This represents the long-term 1 Unscheduled departing aircraft operating after 12.30 on non-disrupted days, with the goal commitment we have to our local environment. seeking to at least halve the number by 2022

34 ANNUAL REPORT AND ACCOUNTS 2019 A THRIVING STRATEGIC REPORT SUSTAINABLE ECONOMY

More than 400 businesses operate from or supply goods and Through our World of Opportunity programme, we also services to Heathrow, but our influence stretches far beyond partnered with the DIT to offer 20 SMEs across the UK a grant our boundary. As the UK’s only hub airport, we have a critical and export advice to expand their business overseas. This role to play in the national economy – both today and in the year’s winners included a Yorkshire-based family business that future. We want to use our influence to drive change that is produces a range of premium honeycomb chocolate; a ethical, low-carbon and sustainable. Scottish business aiming to simplify access to space; a South West-based pet food business and a social enterprise creating CONNECTING THE UK a range of ethically designed, light-reflective adaptable accessories for cyclists and outdoor enthusiasts. By 2033, we want the UK’s 100 largest towns and cities to be connected to Heathrow, through direct coach, rail services, and domestic air routes. SUSTAINABLE SUPPLY CHAIN Flagship goal: All our direct supply-chain colleagues working In December, we increased our surface-access connectivity to

at Heathrow will be transitioned to be paid the London Living GOVERNANCE REPORT the UK; we are now connected to 64 of the UK’s 100 largest Wage by the end of 2020, and we will encourage commercial towns and cities, with Warrington and Southport now partners and our supply chain to work towards the London connected via a new coach service, and Lincoln and Harrogate Living Wage, while continuing to give affordable service268 to connected through a change to the London North Eastern our customers. Railway train timetable. We also launched a new connection to Guildford, thanks to a new RailAir coach link with First 2019 64 Bus. The hourly service connects Heathrow with Guildford train station and is timed to coincide with fast trains from 2019 49 the south. 201 NA THE NEXT ECONOMY 2 Small and medium-sized businesses (SMEs) play an important London living-wage contracts role in the UK economy as job creators and sources of innovation. We support them to join our supply chain and to We’ve been a London Living Wage employer since 2017. As showcase their products to Heathrow passengers. we work to move all our direct supply-chain colleagues at Heathrow to the London Living Wage by 2020, we are also We held our 23rd annual flagship Heathrow Business removing the use of zero-hours contracts. We have exceeded Summit. This followed a year-long tour consisting our target by updating 64 out of 108 supplier contracts of 11 Business Summits in cities across the UK , including included in the scope of our London Living Wage Roadmap, Edinburgh, Newcastle, Stoke, Belfast and Cardiff, in uplifting an estimated 1,300 Team Heathrow colleagues to conjunction with local business organisations and supported the Living Wage and protecting an estimated 1,275 through by the Department for International Trade (DIT). These contractual changes during 2019.

provided opportunities for over 870 SMEs to meet with our FINANCIAL STATEMENTS largest suppliers and professional trade advisers, and to find SUSTAINABLE RETAIL EXPERIENCE out about opportunities around the country connected to Heathrow’s expansion. In 2019, Heathrow became the world’s first Sustainable Fish Airport, recognised by Sustain (the alliance for better food and farming). All 37 retail and food suppliers at the airport have signed up, meaning that four million fish meals served at Heathrow each year will SUSTAINABILITY HERO now be more sustainably sourced.

SAM HAVARD SENIOR ACCOUNT MANAGER “I worked with our retailers to switch all coffee cups to recyclable paper versions to reduce our single-use plastic waste.”

2 The number of amended and renegotiated contracts to be London Living Wage compliant, with the goal of all direct supply-chain colleagues working at Heathrow to be transitioned by the end of 2020.

ANNUAL REPORT AND ACCOUNTS 2019 35 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) A WORLD WORTH TRAVELLING

Our world is a joy to travel. But we must do more to protect it if we want to keep enjoying all it has to offer. First and foremost, we have to address carbon. The UK aviation sector including Heathrow has committed to net-zero emissions even as we grow. Heathrow is using its scale and influence globally to lead change towards that goal. The enemy is not aviation but carbon. The UK industry’s pathway shows how we can protect the benefits that aviation brings in a world without carbon. As Heathrow we’ve also set a goal to operate a zero- carbon airport.

SUSTAINABILITY HERO

ALAN SABLE SECURITY MANAGER “I launched Heathrow’s first hard hat recycling scheme. Over 600 hats have been recycled, with £6k raised for charity!”

SUSTAINABILITY HERO

NZINGA ORGILL INNOVATION MANAGER ”I ran a trial to develop the world’s first electric driverless baggage dolly. We’re hoping it will improve efficiency while reducing our emissions.”

36 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS

Heathrow Centre of Excellence working with Lancashire Wildlife Trust on our first restoration project at Little Woolden Moss, part of Chat Moss, a larger wetland area west of Manchester.

ANNUAL REPORT AND ACCOUNTS 2019 37 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) OUR CARBON STRATEGY

Climate change is the greatest challenge facing our generation. The goal could Definitions Carbon-Neutral not be clearer: we need to get the global To offset residual carbon emissions, credits can be economy to net-zero by 2050, if not purchased from carbon removal projects (such as afforestation) or from paying for activity in other earlier. That includes the aviation industry. sectors that reduces carbon emissions elsewhere, for example paying for renewable energy projects Aviation is a force for good in the world, helping power to replace the burning of fossil fuels. economic growth and bring people and cultures together. Heathrow matters because of our role connecting the UK to We became carbon-neutral for airport infrastructure global growth. Aviation is not the enemy – carbon is. in January 2020. At Heathrow, we will not shy away from the challenge to Net-Zero protect the benefits of aviation in a world without carbon. This means that the maximum feasible emission- Action here matters not just because we must help the UK reductions of carbon have been made, and any achieve its net-zero target, but because we can use our status residual emissions are counterbalanced by an equal as a major global hub airport to accelerate change in our volume of carbon removals achieved by purchasing industry and around the world. offset credits. We know that change is possible. While UK passenger By the end of 2020 we will publish our plan to numbers have grown by 25% since 2005, there has been a achieve net-zero for airport infrastructure as soon 3% reduction in carbon emissions. However, our ambition as possible. Sustainable Aviation has also must be greater, and the whole aviation industry must make committed the UK aviation industry to achieving progress faster with the help of Government. net-zero by 2050. The whole UK aviation sector– airlines, airports and Zero-carbon airport infrastructure manufacturers – has recently committed to reach net-zero Generating no carbon from the energy used emissions by 2050. That is the target that the to run Heathrow, including all our buildings and Intergovernmental Panel on Climate Change (IPCC) fixed assets. We are working towards becoming recommend is required to stand the best chance of limiting a zero-carbon airport by the mid-2030s. temperature rises to 1.5 degrees. It is the target that the UK Government has set. Sustainable Aviation’s “Pathway to Net-Zero” shows that target can be met even as the industry and Heathrow grow, through a mix of cleaner aircraft and That’s why we have recently published our new carbon plan engines, new sustainable fuels and high-quality greenhouse showing how we will act over the next ten years, alongside gas removals. airlines, manufacturers, governments and passengers. It The 2020s is the critical decade in the fight against climate includes clear goals that will help us to get our own emissions change. The action we all take over the next ten years will to net-zero, help the whole industry achieve a net-zero future determine whether we can reverse the climate emergency. and use our scale to help the wider economy decarbonise too.

38 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

TARGET NET-ZERO: OUR CARBON PLAN

Finishing the job of getting our own house in order 1. We will keep investing until all our airport infrastructure and vehicles are zero-carbon.

Working with our Team Heathrow partners and with passengers to eliminate carbon on the ground 2. We will support business partners to ensure vehicles at

Heathrow meet ultra-low emissions standards by 2025 as GOVERNANCE REPORT a step toward a full zero carbon fleet in the future. 3. We will make it easier for the 76,000 people who work at Heathrow, our passengers and all those who travel in our local area to reduce their emissions from travel on the ground. TOWARDS A NET-ZERO UK 4. We will become a world-leader in low-carbon construction, We welcome the UK Government’s announcement setting a clear baseline and ambitious reduction targets to of a legally binding target of net-zero emissions by reduce embodied carbon from expansion of the airport. 2050 and the Committee on Climate Change’s We will offset residual emissions. recommendation to include aviation in this target. Our carbon targets are consistent with this objective, Working with our industry partners, Government and and, together with 203 other airports, we support passengers to decarbonise flight ACI-Europe’s (Airports Council International) 5. We will work to build a global aviation industry ‘high commitment to achieve net-zero carbon emissions ambition coalition’ with the aim of agreeing a global by 2050. net-zero emissions target at the ICAO general assembly The ACI-Europe commitment also called for the in 2022. global aviation sector to commit to net-zero. IAG, 6. We will help accelerate the production and use of our largest airline customer, was the first airline Sustainable Alternative Fuels (SAFs). group worldwide to commit to net-zero carbon for flight by 2050 and several airlines including 7. We will support the development of technologies which Qantas, Etihad and easyJet have also announced can get aviation to fully zero-carbon flight.

such targets. We are working with them, and others FINANCIAL STATEMENTS to make this the standard in global aviation, to Removing carbon from the atmosphere take the carbon out of flying and remove any 8. We will help passengers to offset their flights and increase competitive distortions. our own investment in natural and technological solutions Together with other members, we also support the to remove carbon from the air until aviation reaches net- UK Sustainable Aviation coalition’s commitment, zero carbon. announced in January 2020, for UK aviation to We will keep evolving this plan and testing ourselves to go achieve net-zero emissions by 2050. further wherever possible, working with airlines, airports, manufacturers, government and academics to consider what further steps we can take together. We believe there is scope for the Government to help the aviation industry move faster by supporting the development of new zero-carbon technologies, developing a clear net-zero standard, investing in new public rail schemes and incentivising the development and take-up of more sustainable aviation fuel – for example, through the Air Passenger Duty and promoting offsetting. To find out more about our Target Net Zero plan visit http://www.heathrow.com/net-zero

ANNUAL REPORT AND ACCOUNTS 2019 39 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)

Low-carbon aviation in action: highlights of our progress so far

We continue to make progress to cut WORKING WITH OUR PARTNERS TO DECARBONISE FLIGHT our own emissions and work with our industry partners to do the same. We also ENCOURAGING GREENER AND QUIETER AIRCRAFT 64% of flights landing at Heathrow are made by the want to be at the forefront of helping newest and greenest aircraft. Airlines can benefit from people travel in a smarter and cleaner landing fees up to 11 times cheaper by utilising greener and quieter aircraft, steering them towards better choices for way, helping to catalyse change across people and planet. the aviation industry. Here are some of SUPPORTING SUSTAINABLE FUELS PILOT PROJECTS the highlights of our progress in 2019. Our 2019 Innovation Prize, worth £30,000, attracted 34 entries on the theme of zero-carbon air travel. The winning entry was research by University College London and specialist FINISHING THE JOB OF GETTING OUR OWN catalyst company Catal, to turn unrecyclable plastic waste – HOUSE IN ORDER including food packaging and plastic film – into a chemical feedstock that could be used for a range of potential products We have cut emissions from energy used to power and heat including low-carbon fuels. Heathrow by well over 90% since 1990. Heathrow now runs entirely on renewable electricity and green gas. Some of our heat and power is generated on site from one of the UK’s RESTORING ENGLISH PEATLAND TO OFFSET OUR largest biomass boilers, run on sustainable woodchip from the CARBON EMISSIONS local region. Our goal is to operate fully zero-carbon We are restoring English peatlands - a type of natural habitat infrastructure by the mid-2030s. To do that we will switch to critical for biodiversity - to take carbon out of the air. Our first an electric heat pump system to warm and cool the airport unique project with Lancashire Wildlife Trust, covering 70 and switch all our vehicles to electric too. hectares, is expected to sequester more than 22,000 CO2 tonnes over 30 years. WORKING WITH OUR TEAM HEATHROW PARTNERS AND PASSENGERS TO CUT CARBON ENGAGING PASSENGERS ON THE GROUND We want to make it easier for customers to reduce the carbon impact of their flights. In early 2020, we launched a consumer offsetting platform – making it quick and easy for customers MORE EFFICIENT AIRCRAFT MOVEMENT to purchase carbon offsets to cover their flights. The offsets We are working with airlines and NATS on ways to cut will support a reforestation program in Uganda and a wind emissions from aircraft. They include encouraging airlines to farm in Costa Rica. use a reduced number of engines to taxi to and from the runway, adopting smart airfield design to decrease taxiing We also ran an awareness campaign to highlight the work distance, using plug-in power and improving take-up of we’re doing on climate change and show people how they pre-conditioned air (PCA) for aircraft at the gate. can get involved.

LEADING THE CHARGE TOWARDS ELECTRIC TRAVEL We have invested over £7 million to build one of the biggest electric-vehicle charging networks in Europe, and we are giving away up to £1million in landing fees to the first airline to fly a commercial, electric or hybrid service from Heathrow.

40 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

These adverts are part of our carbon campaign for our passengers, which we launched in January 2020. The campaign focuses on how Heathrow is tackling the elephant in the airport - climate change. GOVERNANCE REPORT FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 41 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) OUR CARBON FOOTPRINT

We monitor our carbon footprint 6% 2% 1% and report on our greenhouse gas Colleague travel Third-party Utilities and to and from operational Heathrow’s emissions annually. This helps us to the airport vehicles operational identify opportunities to reduce our vehicles emissions and work towards our aim of zero-carbon airport infrastructure by the mid 2030s.

The data in this report is for 2018. Our carbon footprint data for 2019 will be published later in 2020. Calculating our footprint relies, in part, on external data sets which are not yet available. This footprint follows Airports Council International’s (ACI) Airport Carbon Accreditation guidance, so includes emissions from our infrastructure, travel to and from the 27% 64% airport and aircraft in the landing and take-off (LTO) cycle. Passenger travel to Aircraft landing It does not account for emissions from aircraft in cruise, and from the airport and take-off cycle which account for 89% of Heathrow’s total emissions (based on 2016 emissions).

Emission source Greenhouse gas emissions (tCO e) Our scope 1 and 2 footprint reflects our operational control 2 both at the airport and off-site – including our parking-pod 2016 2017 2018 test track and Business Support Centre (BSC) – and aligns with the Greenhouse Gas Protocol (GHGP), which provides SCOPE 1 30,23 26,691 26,2461 8 accounting and reporting standards, as well as sector SCOPE 2 63,393 15,680 0 guidance. Market-based emissions for grid electricity have (electricity consumption - been used to calculate total emissions. market based) Scope 2 market-based emissions for 2018 were nil. This is SCOPE 22 121,049 97,408 79,921 (Grid electricity consumption because our electricity was sourced using a Renewable Energy – location based) Guarantee of Origin (REGO) backed contract. The REGO SCOPE 3 2,083,077 2,006,786 2,062,895 certificate covers Heathrow Airport Limited, our parking-pod test track and BSC (in Glasgow), all of which fall under Scope Total3 2,176,708 2,049,157 2,089,141 2 electricity. Our scope 3 footprint includes emissions that Heathrow 1 A reduction of 2,105 tonnes was attributed to purchasing Renewable Gas Guarantee of Origin certificates (RGGOs) doesn’t control but can influence. Such emissions include 2 Following the Greenhouse Gas Protocol these scope 2 emissions are reported together, passenger and colleague surface access and emissions from however location based emissions are not included within total emissions. aircraft in the LTO cycle. Our scope 3 footprint does not 3 Excludes Scope 2 (Grid electricity consumption – location based). currently include supply-chain emissions, specifically from freight and logistics activity. However, we are currently mapping out these emissions as part of our Carbon Trust supply-chain accreditation.

42 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS HOW WE PERFORMED IN 2018 Our carbon footprint increased by 1.95% year-on-year but passenger and colleague travel to the airport. There was a decreased by 4% over two years. small rise in emissions from aircraft in their landing and take-off (LTO) cycle, in line with a slight increase in the Carbon emissions we control (approximately 1%) fell due to number of flights. improvements in energy efficiency and our purchase of renewable electricity. We offset any scope 1 and 2 carbon (and scope 3 business travel) emissions, that we can’t yet eliminate, by purchasing Heathrow uses only 100%, REGO-certified renewable carbon credits. For our 2018 emissions, we purchased 27,244 electricity, with wind as the main source – so everything from carbon credits to offset Heathrow’s gas, electricity, the check-in screens to last-minute, pre-flight phone battery operational vehicles and business travel, making Heathrow top-ups is powered by 100% renewable electricity. With 124 carbon-neutral for our scope 1 and 2 emissions. We have also solar panels on its roof, and its own biomass boiler powered purchased carbon credits to offset anticipated emissions for by waste wood chips from woodlands in southern England, 2019 to 2021. Terminal 2 is generating its own green energy too. Further details can be found in our carbon-footprint report at Carbon emissions that we influence (approximately 99%) www.heathrow.com. increased year-on-year due to increases in areas such as

ANNUAL REPORT AND ACCOUNTS 2019 43 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) EXPANSION

Heathrow is the UK’s only hub airport, serving more than 80 million passengers last year and providing over 75% of the UK’s long-haul connections. We also play a vital role in trade; we’re the UK’s largest port by value, handling over £118 billion in

total value of non-EU trade in the last Our draft preferred Masterplan proposes a new year. However, Heathrow has been full-length runway to the north-west. operating at 99% capacity for more BENEFITS INCLUDE: than a decade. While competitor hub • 10,000 apprenticeships by 2030. • Up to 40,000 new local jobs during construction airports across Europe and beyond and operation of the expanded airport. have been expanding their networks, • Supply-chain opportunities spread across the UK, including four logistics hubs. Heathrow’s growth, and consequently • At least 260,000 additional ATMs. the UK’s growth, has been constrained. • Up to 40 new long-haul trading routes. • Doubles current cargo capacity for British exporters. • Economic growth and benefits for UK PLC.

44 ANNUAL REPORT AND ACCOUNTS 2019 EXPANDING HEATHROW IN THE RIGHT WAY STRATEGIC REPORT

Air Noise Air Quality Surface Access Carbon

6.5 hour ban on Heathrow Ultra Low 25% reduction in Delivered carbon-neutral scheduled night flights. Emissions Zone by 2022. colleague car trips by airport operations. Fewer people impacted Expanded infrastructure for 2030 and 50% by 2040 Committed to achieving by noise contour than charging electric and At least 50% of our zero-carbon airport in 2013. hybrid vehicles. journeys made to the infrastructure by 2050 but Greatly expanded noise Vehicle access charge. airport by public transport working towards achieving by 2030 and at least 55% this sooner, by the insulation programme for Surface Access Strategy by 2040. mid-2030s. eligible properties. implementation. Improving bus and rail Aspire for carbon- Implement our no traffic connectivity. neutral growth from the pledge. new runway.

Expanding Heathrow will connect all of the UK to global KEY EXPANSION DEVELOPMENTS growth for generations to come. We would be one of the best-connected countries in the world, with regular direct Heathrow expansion took a significant step forward in 2019 flights to all the major cities in the United States, China and as we completed our statutory consultation after unveiling

India, the great economies of the 21st century. our Draft Preferred Masterplan for the project. The GOVERNANCE REPORT consultation outlined the latest plans for our future airport, Heathrow Expansion will add up to 40 new long haul routes; it will create new domestic routes so all parts of the UK can how we propose to operate and manage our growth and connect to the world via the UK’s hub; and it will double how we will ensure a sustainable, affordable, financeable cargo capacity to help British businesses get their goods to and deliverable expanded Heathrow at no cost to the key markets. The construction and operation of an expanded taxpayer. Heathrow will generate tens of billions of pounds in GDP and On 27 February 2020, the Court of Appeal concluded that the tens of thousands of jobs across the country, while pioneering Government was required but failed to take account the off-site manufacturing through a network of four Logistics Paris Climate Agreement when preparing the Airports Hubs located across the UK. For passengers, new capacity will National Policy Statement (‘ANPS’). The Court declared that drive down airfares through greater competition and more the ANPS has no legal effect unless and until the choice of airlines and destinations. Government carries out a review of the policy. On a local level, expansion means 10,000 apprenticeships The Government declined to appeal to the Supreme Court and up to 40,000 new local jobs, so future generations can fulfil their career potential at an expanded Heathrow. Our directly, but Heathrow and other interested parties have plans include transformational investment in our local area applied for permission to appeal the Court of Appeal ruling. to setr ngthen transport connections, education and skills Heathrow has already taken a lead in getting the UK aviation opportunities, and the creation of new green spaces to bring sector to commit to a plan to get to Net Zero emissions by communities closer together and improve quality of life. 2050, in line with the Paris Agreement, and we are ready to In 2018, MPs voted overwhelmingly in support of the work with Government to achieve this. Expanding Heathrow Airports National Policy Statement at a ratio of almost 4:1, remains a key part of our long-term strategy once we have

which was then designated by Government. Since then, we’ve beaten COVID-19 and entered the recovery phase. However, FINANCIAL STATEMENTS refined our plans through consultation and engagement with given the current COVID-19 crisis and the ongoing appeals local communities, airlines, passengers, and a wide range of process, we expect expansion and related capital other stakeholders. investment to be delayed by at least two years. COVID-19 is discussed in further detail in our outlook on page 20 and in Heathrow’s Q1 results which can be found on our website.

EMMA GILTHORPE Executive Director Expansion

ANNUAL REPORT AND ACCOUNTS 2019 45 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) OUR CHARITY PARTNERSHIPS

Our Team Heathrow colleagues raising money for all three of our main charity partners, at our Midnight Marathon event in 2019.

As the UK’s leading airport, we have a responsibility to not only reduce the negative impacts we create for our stakeholders, but to deliver a positive future as well. Working with three chosen charity partners and overseen by our Charities and Communities Committee, we raise funds, donate time and meet the shared objectives of colleague and passenger engagement and our community strategy in order to deliver our Heathrow 2.0 sustainability commitments. Our charity partners are:

• CARE International UK - our international partner • Duke of Edinburgh Awards Scheme – our national partner • Heathrow Community Trust – our local partner In 2019 we donated £0.9 million (2018: £1.0 million) and we also leveraged1 funds totalling £0.6 million from colleague fundraising, passenger donations and donations from other airport companies.

1 Leverage is a measure of additional resources contributed to charities from sources other than the company.

46 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

CARE International CARE International is a charity that works around the globe in 100 countries to save lives, defeat poverty and achieve social justice. Our partnership enables our passengers and colleagues to support entrepreneurs living in poverty around the world, through the ‘Lendwithcare’ initiative. ‘Lendwithcare’ is an online lending platform that allows you to personally give entrepreneurs much-needed access to credit and Heathrow GOVERNANCE REPORT training. This money is then used to help change the lives of those living in poverty. CARE receives Community Trust donations from our passengers and money generated through fundraising by Heathrow Heathrow Community Trust is an independently run colleagues and others. grant-making charity.

In 2019 passengers donated £286,000 and a further The Trust’s grant programme funds projects that 1 £38,000 was leveraged from colleague and Team improve quality of life for communities near the Heathrow fundraising. airport. It also supports colleague volunteering and fundraising to improve the community where they live or a cause that they believe in. As well as input funding from Heathrow, the Trust receives noise fines levied on airlines when they break noise regulations, donations from other companies associated with the airport and money generated through fundraising by Heathrow colleagues and others. In 2019 we gave £725,000 and a further £107,000 was leveraged1 from colleague and The Duke of Team Heathrow fundraising.

Edinburgh’s Award FINANCIAL STATEMENTS The Duke of Edinburgh’s Award (DofE) programme transforms young people’s confidence, skills and wellbeing. Our partnership gives colleagues the chance to FUNDRAISING challenge themselves to do their own Gold DofE Award and to participate in fundraising events that unlock their own potential, building self-belief and team-working abilities. This includes taking on We helped to leverage1 funds worth £263,000 from challenges and offering work experience days for colleagues and fundraising events, £286,000 from local young people. passenger donations and £41,000 from other airport DofE receives a combination of input funding from companies. These funds were largely split between Heathrow and money generated through fundraising our three main charity partners, with £17,000 donated by Heathrow colleagues and others. to other charities. In 2019 we gave £200,000 and a further Events in 2019 included Midnight Marathon where £142,000 was leveraged1 from colleague and over 400 Team Heathrow colleagues took part, raising Team Heathrow fundraising. over £50,000.

ANNUAL REPORT AND ACCOUNTS 2019 47 FINANCIAL REVIEW

Heathrow remains in strong financial health. Passenger growth supported a 3.5% increase in revenue.

A focus on efficiency, combined with revenue growth resulted in adjusted EBITDA increasing 2.0% to £1.8bn. Heathrow continues to invest in its future, and £856 million was invested into the airport this year. Strong balance sheet with liquidity extended to October 2021 after raising £2.1bn in global capital markets.

JAVIER ECHAVE Chief Financial Officer

48 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

2019 2018 Year ended 31 December £m £m

Revenue 2,976 2,874 Adjusted operating costs1 (1,148) (1,082)

Adjusted EBITDA2 1,828 1,792 Depreciation and amortisation (736) (742)

Adjusted operating profit3 1,092 1,050 Net finance costs before certain remeasurements (411) (467)

Adjusted profit before tax 681 583

Tax charge on profit before certain remeasurements (164) (148) GOVERNANCE REPORT

Adjusted profit after tax4 517 435

Including certain remeasurements Fair value gain on investment properties 43 117 Fair value gain/(loss) on financial instruments 95 (98) Tax charge on certain remeasurements (24) (8)

Profit after tax 631 446

1. Adjusted operating costs excludes depreciation, amortisation and fair value adjustments on investment properties. 2. Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value adjustments on investment properties. 3. Adjusted operating profit excludes fair value adjustments on investment properties. 4. Adjusted profit before and after tax excludes fair value adjustments on investment properties and financial instruments and associated tax.

BASIS OF PRESENTATION OF FINANCIAL RESULTS SUMMARY PERFORMANCE Heathrow Airport Limited (the ‘Company’) has prepared its In the year ended 31 December 2019, the Company’s revenue financial statements and financial review in accordance with climbed 3.5% to £2,976 million (2018: £2,874 million). FRS 102. Adjusted EBITDA increased 2.0% to £1,828 million (2018: £1,792 million), and its profit after tax increased 41.5% to Management use Alternative Performance Measures (APMs) £631 million (2018: £446 million).

to monitor performance of the segments as it believes this FINANCIAL STATEMENTS more appropriately reflects the underlying financial performance of the Company’s operations. A reconciliation of our APMs has been included on page 154.

ANNUAL REPORT AND ACCOUNTS 2019 49 FINANCIAL REVIEW (CONTINUED)

REVENUE RETAIL REVENUE In the year ended 31 December 2019, revenue increased 2019 2018 Var 3.5% to £2,976 million (2018: £2,874 million). Year ended 31 December £m £m % Retail concessions 342 323 5.9 2019 2018 Var Catering 64 61 4.9 Year ended 31 December £m £m % Other retail 113 128 (11.7) Aeronautical 1,831 1,745 4.9 Car parking 125 126 (0.8) Retail 722 716 0.8 Other services 78 78 0.0 Other 423 413 2.4 Total retail revenue 722 716 0.8 Total revenue 2,976 2,874 3.5 Retail revenue has grown by 0.8%, retail revenue per Aeronautical revenue has increased by 4.9% compared passenger remained flat at £8.93 (2018: £8.94). Growth was to 2018. Aeronautical revenue per passenger increased led by retail concessions and catering, reflecting record 3.9% to £22.64 (2018: £21.78). A combination of record passenger traffic. The pound weakening against both the passenger traffic, favourable mix of passengers and Euro and US Dollar also contributed in driving retail recovery of prior-year yield dilution continue to be key concessions. Other retail revenue declined due to bureaux drivers of growth. This has been partially offset by the customers favouring alternative methods of prebooked introduction of our new commercial airline deal, providing currency, and a one off contractual benefit received in 2018 a saving of £0.55 per passenger on airline charges. which will not reoccur. Excluding the one off contractual benefit in 2018, retail revenue per passenger would have increased by 1.0% to £8.93 (2018: £8.83).

50 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

OTHER REVENUE

Other revenue decreased 2.4% in 2019 to £423 million. Property and other revenues grew 4.5% driven by rail track- access charges. Heathrow Express saw a 46.7% increase in revenue due to track access for the use of the track from Airport Junction to the airport stations. In addition, track access income from MTR Corporation (Cross Rail) for access to the track from Airport Junction to London Paddington. OPERATING PROFIT AND ADJUSTED EBITDA

2019 2018 Var In the year ended 31 December 2019, operating profit Year ended 31 December £m £m % decreased 2.7% to £1,135 million (2018: £1,167 million). The Other regulated charges 239 243 (1.6) decrease was due to a lower gain in the non-cash fair value of our investment properties. Heathrow Express 22 15 46.7 Property and other 162 155 4.5 2019 2018 Total other revenue 423 413 2.4 Year ended 31 December £m £m Operating profit 1,135 1,167

Depreciation and amortisation 736 742

EBITDA 1,871 1,909 ADJUSTED OPERATING COSTS

Fair value gain on investment properties (43) (117) GOVERNANCE REPORT Adjusted operating costs increased 6.1% to £1,148 million (2018: £1,082 million). Adjusted operating costs Adjusted EBITDA 1,828 1,792 per passenger increased by 5.0% to £14.19 (2018: £13.51). Depreciation and amortisation increased to £736 million (2018: £742 million).

2019 2018 Var Fair value gain on investment properties decreased to £43 Year ended 31 December £m £m % million (2018: £117 million) due to a smaller increase in the Employment 367 355 3.4 value of our car parks compared to 2018. Operational 290 252 15.1 Adjusted EBITDA increased 2.0% to £1,828 million (2018: Maintenance 163 165 (1.2) £1,792 million), resulting in an adjusted EBITDA margin of Rates 116 119 (2.5) 61.4% (2018: 62.3%). Utilities and Other 212 191 11.0

Adjusted operating costs 1,148 1,082 6.1

Operational costs have increased as we gear up for growth with investment in expansion, security, resilience and passenger experience. We spent more on services for passengers with reduced mobility, upgrading drone defence capabilities, implementing new hold-baggage screening and investing in our IT systems. Utilities costs also increased due to a rise in government levies on usage, whilst overall consumption declined. FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 51 FINANCIAL REVIEW (CONTINUED)

PROFIT AFTER TAX TAXATION For year ended 31 December 2019, the Company recorded a The total tax charge for the year ended 31 December 2019 profit before tax of £819 million (2018: £602 million profit). is £188 million (year ended 31 December 2018: £156 million), Profit after tax increased 41.5% to £631 million (2018: £446 representing the sum of the tax charge on profits before million profit). certain remeasurements and the tax charge on certain 2019 2018 remeasurements. The tax charge before certain re- Year ended 31 December £m £m measurements for the year ended 31 December 2019 was Operating Profit 1,135 1,167 £164 million (2018: £148 million), resulting in an effective tax rate of 24.1% (year ended 31 December 2018: 25.4%). The Net finance costs before certain (411) (467) effective tax rate being higher than (2018: higher than) the remeasurements statutory rate of 19% (2018: statutory rate of 19%) primarily Fair value gain/(loss) on financial instruments 95 (98) reflects the fact that a substantial proportion of Heathrow’s Profit before tax 819 602 capital expenditure does not qualify for tax relief. For the period, the Company paid £98 million (year ended 31 Taxation Charge (188) (156) December 2018: £70 million) in corporation tax. Profit after tax 631 446 Net finance costs before certain remeasurements decreased to £411 million (2018: £467 million) due to RPI growth rate for the 12 months to December 2019 falling to 2.2%, down from 3.2% in the same prior period. Fair value gains on financial instruments increased to £95 million (2018: loss of £98 million) as a result of a decrease in long term inflation expectations.

52 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

CAPITAL EXPENDITURE RECENT FINANCING ACTIVITY Total capital expenditure in 2019 was £856 million (2018: Continued confidence and support for our credit through £793 million). We invested £620 million (2018: £666 million) expansion enabled us to raise £2.1 billion of debt in 2019. in a variety of programmes to improve the passenger This funding underpins our robust liquidity position and experience, airport resilience and for asset replacement. We provides additional duration and diversification to our £14 also progressed our plans to expand Heathrow with billion debt portfolio. 2019 funding activities comprised investment of an additional £236 million in the period (2018: around £1 billion in Class A, including a JPY note £127 million). representing our eighth currency of issuance, £75 million in We continued to invest in airfield and resilience programmes. Class B and £1 billion of debt raised at Heathrow Finance. Work is underway to meet the next-generation security requirements mandated by the Department for Transport Class A financing activities included: (DfT). Significant investment continues in automating the a) A €650 million 15-year Class A bond maturing in 2034. passenger journey with the roll-out of self-bag drops and GOVERNANCE REPORT b) A 86 million 20.5-year Class A zero coupon bond self-boarding gates across all terminals. Further investment € maturing in 2039. has also been made to increase capacity in Terminal 5, with 20 new carriages now on order to double the capacity on the c) A CHF210 million 7.5-year Class A bond maturing in Track Transit System, linking the main terminal to satellite 2026, marking our 3rd Swiss franc issuance. buildings. The Hold Baggage Screening (HBS) upgrade works d) A £140 million Class A term debt maturing in 2037. are progressing well, with the Terminal 5 programme now fully complete. The works in Terminal 4 are progressing well e) The repayment of our $400m CAD bond. and scheduled to achieve the DfT compliance date in September 2020. f) An inaugural JPY10 billion 20-year Class A note maturing in 2039. Expansion-related capital expenditure includes Category B costs associated with the consent process and also includes Class B financing activities included: early Category C costs predominantly relating to early a) A £75 million 15-year Class B private placement maturing design costs. in 2035 to be drawn in April 2020. Since 2016, Heathrow has invested £361m in Category B costs Financing activities at Heathrow Finance included: and £89m in Category C costs, a total of £450m that is carried in our balance sheet as assets in the course of a) £700 million new loan facilities, with various maturities construction. By the end of 2020, it is currently forecast that out to 2035, which are partially drawn. this asset under the course of construction will increase to b) A £300 million 10-year Heathrow Finance bond maturing c.£1bn as set out in the Investor Report published on 20 in 2029. December 2019. c) The early repayment of £267 million 2019 Heathrow As outlined in our summary of current regulatory and legal FINANCIAL STATEMENTS Finance bond on the 4th March 2019. challenges to expansion, if the likelihood of expansion occurring was no longer probable, capital expenditure would d) The repayment of £325 million of term loans. be required to be impaired. This would significantly reduce the e) The migration of £75 million raised by ADIF2 to Heathrow available distributable reserves of Heathrow Airport Limited Finance in March 2019. (the legal entity holding the asset). Based on distributable reserves as at the 31 December 2019 the potential impairment Our revolving credit facilities were amended to include direct would not result in negative distributable reserves within link to ESG factors and extended to 2023. Heathrow Airport Limited. It should also be noted that the non-cash impairment recognised under FRS 102 is separate to the Regulatory Asset Base. Should a planning decision or the appeal to the Judicial review go against us we expect that most of the assets will remain in the Regulatory Asset Base and continue to generate a return through the regulatory framework. As a result, key covenant ratios would not be materially affected as they are based on the Regulatory Asset Base and income excluding exceptional items.

ANNUAL REPORT AND ACCOUNTS 2019 53 FINANCIAL REVIEW (CONTINUED)

FINANCIAL RATIOS The Company continues to operate comfortably within required financial ratios. Gearing ratios under the Heathrow Airport Holdings Limited (or ‘HAHL’ as defined on page 78) Group’s financing agreements are calculated by dividing nominal net debt by Heathrow’s Regulatory Asset Base (RAB). At 31 December 2019, Heathrow’s RAB was £16,598 million (31 December 2018: £16,200 million). Heathrow SP’s senior (Class A) and junior (Class B) gearing ratios were 66.6% and 74.7% respectively (31 December 2018: 68.2% and 76.6% respectively) with respective trigger levels of 72.5% and 85%. Heathrow Finance’s gearing ratio was 86.5% (31 December 2018: 86.3%).

PENSION SCHEME We operate a defined-benefit pension scheme (the BAA Pension Scheme), which closed to new members in June 2008. At 31 December 2019, the defined benefit pension scheme, as measured under IAS 19, was funded at 100.8% (2018: 100.7%). This translated into a surplus of £33 million (2018: £28 million surplus). The £5 million increase in the surplus in the 12 months is primarily due to actuarial losses of £17 million, attributable to a decrease in the net discount rate of 0.65% over the 12 months and offset by contributions in excess of current service cost of £22 million. At 31 December 2019, we contributed £47 million (2018: £48 million) into the defined-benefit pension scheme including £23 million (2018: £23 million) in deficit-repair contributions. Management believes that the scheme has no significant plan-specific or concentration risks. The triennial valuation (as at 30 September 2018) has been completed and agreed by the Trustees of the scheme and LHR Airports Limited, setting out the contributions needed to cover the costs of the benefits that active members will build up in the future, and additional cash contributions from Heathrow to make up the shortfall between liabilities calculated on a technical provisions basis and assets at that date. Cash contributions of £20 million per year from 1 October 2019 (£23 million per year before 1 October 2019) are expected to eliminate the shortfall within four years.

JAVIER ECHAVE Chief Financial Officer

54 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 55 OUR APPROACH TO CAPITAL ALLOCATION

For Heathrow to generate stable Our stakeholders benefit from the investment into the UK’s only hub airport. We submitted our Initial Business Plan to the long-term returns, significant investment CAA in December 2019 which describes our plans to deliver further investments to improve customer service, increase is required. To make these investments efficiency, and expand the airport in a sustainable way. we must ensure that we have access to We are incentivised to continue to invest and generate long term returns, through economic regulation from the CAA, appropriate capital in both the short which allows a return on efficient investments. When this and long term. return is sufficient, it allows us to access capital markets and obtain the finance required to invest. Our primary sources of capital are; Proposed future investment and consideration of the 1. equity investment from our shareholders, ability to access suitable funds are monitored and managed through Heathrow’s short-term Management Business Plan 2. debt provided by third parties, and and its longer term Initial Business Plan and investments are 3. cash generated from our operations. dependent on reaching satisfactory regulatory terms with our regulator. Decisions related to the efficient deployment of capital consider the following; PROVIDING THE GROUP’S ULTIMATE 1. retaining a strong balance sheet, SHAREHOLDERS WITH A FAIR RETURN ON 2. maintaining investment in the business, and THEIR INVESTMENT. 3. providing the our ultimate shareholders with a fair return on their investment. To access equity investment we are required to offer a fair return to shareholders. Where we have met our balance sheet requirements and have concluded we have suitable RETAINING A STRONG BALANCE SHEET capital to meet our investment plans, the Directors seek to provide shareholders with a fair return through a dividend We generate high quality operating cash flows. As a result, payment while delivering our commitment to maintain our we have good liquidity and have been able to maintain a current investment grade credit rating. positive net current asset position. At times of significant investment, the Directors may We seek to ensure that we continue to maintain a strong seek additional capital from its shareholders. To obtain the balance sheet, so that we can comply with debt covenant capital, the Directors are required to demonstrate that they requirements, regulatory restrictions and respond to economic can continue to provide a fair future return in exchange risks in the long term. for this investment. As part of achieving this objective we are subject to regulation The Directors of each of the companies within the Heathrow from the CAA. Directors are required to submit a “Certificate group of companies consider the Group’s capital structure of Adequacy of Resources” to confirm that we expect to have and distributable reserves before proposing dividends. sufficient financial resources, after taking into account any Dividends are only paid where Heathrow has generated dividend or other distribution which might reasonably be enough allowable distributable reserves. expected to be declared, any amounts of principal and interest due under any loan facilities and any actual or Dividends are paid up through the structure of the Heathrow contingent risks which could reasonably be material to their group of companies to fund dividends to the Group’s ultimate consideration, sufficient financial and other resources and shareholders and to repay and service external debt at the financial and operational facilities to enable us to continue Group’s holding companies. The flow of dividends through to provide airport operation services for a period of at least the Heathrow group of companies is illustrated in the two years. simplified diagram on the opposite page. Dividends of £421 million (2018: £483 million) were paid to MAINTAINING OUR INVESTMENT IN THE BUSINESS Heathrow (AH) Limited during the year. These were used to We use our internal cashflow generation and capital fund dividends of £500 million (2018: £500 million) to markets (debt and equity) to continue to invest in the airport. Heathrow’s ultimate shareholders. Since private ownership we have invested over £12 billion of private money.

56 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

DIVIDEND FLOWS FOR THE HEATHROW GROUP OF COMPANIES FGP Topco Limited DIVIDEND TO ULTIMATE No. 5723961 SHAREHOLDER

INTERCOMPANY DIVIDEND

Heathrow Airport Holdings Limited No.5757208

INTERCOMPANY

DIVIDEND GOVERNANCE REPORT

Heathrow Finance PLC REPAY AND SERVICE No. 6458635 EXTERNAL DEBT

INTERCOMPANY DIVIDEND

Heathrow (SP) Limited No.6458621

INTERCOMPANY DIVIDEND

Heathrow Heathrow (AH) Limited Funding Limited No. 6458657 No. 99529

INTERCOMPANY DIVIDEND FINANCIAL STATEMENTS Heathrow Airport Limited No. 1991017

INTERCOMPANY DIVIDEND

Heathrow Express Holding Company Operating Company Limited No. 3145133 Funding Company Operating Company

Structure has been simplified for ease of reference, additional companies exist between these companies.

ANNUAL REPORT AND ACCOUNTS 2019 57 OUR APPROACH TO TAXATION

We have a corporate responsibility to collect and pay tax, and have been working hard to promote tax transparency and build trust with our stakeholders.

Our operations, whilst large, are conducted entirely from the UK with no overseas operations. Accordingly, Heathrow pays a range of UK taxes, such as corporation tax, employment taxes and stamp-duty land tax, and it is one of the biggest business rates payers in the country, paying £1 billion into the public purse over the past decade. Heathrow operates not only within the UK’s tax laws, but also within the spirit of them. All profits are subject to UK corporation tax, and no funds are routed through tax havens. Heathrow has no investments outside the UK that are not subject to UK tax. Overall responsibility for Heathrow’s tax strategy sits with the Board. The Chief Financial Officer, in his capacity as Senior Accounting APPROACH TO RISK MANAGEMENT Officer, is accountable for ensuring Heathrow AND GOVERNANCE has a tax strategy which is appropriate for the Heathrow’s tax strategy was approved by the HAHL Board1 recording and delivery of tax obligations. This in October 2019. Heathrow’s tax strategy confirms: strategy is reviewed and approved by the Audit Committee on behalf of the Board. • How Heathrow ensures the right processes and controls are in place to manage potential tax risks. • Heathrow’s commitment to pay UK tax in accordance with all applicable laws and regulations without the use of arrangements that are contrary to the intentions of Parliament. • Heathrow’s low tax-risk-appetite and commitment to preventing the facilitation of tax evasion. • Heathrow’s commitment to engage with HMRC in an open and transparent manner.

1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 78.

58 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Given the scale of Heathrow’s operations, it is important to ACCEPTED LEVEL OF RISK ensure the right processes and controls are in place to manage potential tax risks. To achieve this, we ensure that the Heathrow’s tax strategy supports our responsible business appropriate policies, processes and systems are in place and strategy. It is focused on ensuring both tax and tax risks are that these are reviewed for operational effectiveness. managed to provide sustainable outcomes. As a result, Heathrow has a low tax-risk appetite. The approach is to We are vigilant in the creation and maintenance of robust mitigate any risk by taking reasonable care whilst also processes for recording the right amount of tax while ensuring considering Heathrow’s brand reputation and the wider that we are adequately staffed with clearly defined roles and airport community. Heathrow is also committed to ensuring each individual has the required skills and support to carry out that tax evasion is not facilitated and has implemented their role effectively. Regular training is provided to ensure the procedures to prevent such behaviour. team is capable of managing the tax risks, including the encouragement of appropriate skills across the business. APPROACH TO HM REVENUE

Where necessary, external tax advice is sought to ensure that GOVERNANCE REPORT the correct amount of tax is considered in relation to any & CUSTOMS (HMRC) business restructure, complex transaction or Heathrow seeks to have an open and transparent relationship legislative change. with HMRC, creating and maintaining mutual trust. The Audit Committee periodically reviews tax matters The tax team is responsible for supporting the business affecting Heathrow. Any concerns are addressed in a tax-risk in meeting its tax obligations in an open and transparent register that evaluates identified risks and supports the manner, ensuring that any inadvertent errors identified are development of a response strategy to address the given item. disclosed to HMRC as soon as reasonably practical and All risks are monitored and controlled as appropriate. processes are put in place to prevent repetition. Heathrow seeks to engage in relevant Government-initiated ATTITUDE TOWARDS TAX PLANNING tax consultations to ensure that the views of business Heathrow pays UK tax in accordance with all laws and are represented. regulations. As part of the business and commercial operations, Heathrow seeks to utilise available tax reliefs, incentives and exemptions in line with both the intent and letter of tax legislation whilst having no involvement in tax planning other than that which arises from genuine commercial activity. This means that Heathrow will not structure transactions in a way which gives a tax result contrary to the intentions of Parliament nor adopt measures to manage its effective tax rate. FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 59 OUR APPROACH TO RISK MANAGEMENT

Identifying, understanding and managing analysed and evaluated to assess the residual risk, ie the risk after mitigating actions and controls. The most risk is fundamental to our strategy and significant risks are collated and reported to the Risk and Assurance Committee, a sub-committee of the Executive success. Committee. The risks are then reviewed by the Executive The Heathrow Risk and Assurance Management system Committee before being submitted to the Audit Committee (HRAM) is an enterprise risk management system that is and Sustainability and Operational Risk Committee for embedded Group-wide with the principal aim of providing independent review and challenge. oversight and governance of the key risks that we face, and to The final Heathrow risk report is then reviewed and monitor upcoming and emerging risks. The HRAM provides approved by the HAHL Board1 on a quarterly basis. guidance on how risks should be identified, mitigated, reviewed and reported within Heathrow. A Principal Risk is a risk that has been identified by the HAHL Board1, its formal committees, the Executive Committee, or Over the past year we have sought to improve the HRAM, and the Risk and Assurance Committee, as an important risk that we will continue to improve our risk processes in 2020. These fundamentally affects the business’s ability to deliver on its enhancements build on the current risk-management overarching objectives. A Principal Risk is assessed structure to enhance the data quality, completeness of risk according to the likelihood, consequence and velocity by information and control measurement in addition to which the risk may impact Heathrow. improving the overall reporting integrity. In particular an ongoing process of bottom-up reviews with each of the Post year end the emergence and spread of the COVID-19 is a Heathrow business functions has been taking place during new principal risk. The pandemic is having a material impact 2019 and will continue into 2020. These reviews identify new on our operations and financial performance and and emerging risks which are then documented in each of the management are still in the process of assessing and function’s risk registers. In addition to bottom-up reviews, responding to its impact. The additional identified COVID-19 principal risks have been identified at a Group level ensuring a risks include significant financial loss from a material comprehensive top-down and bottom-up approach reduction in passengers, restrictions on access to finance to risk identification. including a higher risk of a covenant breach, failure of key customers and suppliers and operational risk from remote The HAHL Board1 has overall responsibility for the HRAM working and organisational restructuring. We have taken framework, establishing the Group’s risk appetite and for immediate action to respond to these risks including reviewing the effectiveness of the risk-response system. There safeguarding Heathrow’s financial resilience by reducing are two HAHL Board1 sub-committees which are responsible for risk: the Audit Committee, which reviews the effectiveness of cost and capital expenditure, liaising with financers and systems for internal financial control, and the Sustainability and credit rating agencies, supporting our customers such as Operational Risk Committee, which reviews the effectiveness of providing free aircraft parking and reviewing our supplier operational reporting and performs an oversight review of the portfolio to better understand our reliance and mitigate risk performance against sustainability goals and operational from failures, we have engaged with and implemented targets. advice from Public Health England to protect our stakeholders and continue to seek new ways to protect our Risks identified by each of Heathrow’s business functions are stakeholders. We will continue to monitor and respond to an formally reported to the central Risk and Assurance Team on evolving and fast changing situation over the coming a quarterly basis by each function’s ‘risk champion’. Risks are months and will provide updates in our next set of results.

1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 78.

60 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

RISK MANAGEMENT

HAHL BOARD LEADERSHIP AND COMMITMENT

Overall responsibility for the enterprise risk management framework.

Review and final approval of Risk Outlook Report GOVERNANCE REPORT

Final approved Risk Outlook Report

AUDIT COMMITTEE EXECUTIVE COMMITTEE SUSTAINABILITY AND Chair: Olivier Fortin Reviews and approves OPERATIONAL RISK Non-Executive Director Risk Outlook Report COMMITTEE Chair: Professor David Begg Non-Executive Director Reviews the effectiveness of systems for internal financial control, financial reporting and risk Reviews the effectiveness of the management. RISK AND ASSURANCE operational reporting and performs COMMITTEE an oversight review of the Approves audit plans and overseas Chair: Carol Hui performance against sustainability reviews performed. Chief of Staff and General Counsel goals and operational targets. Independent review and challenge Independent review and challenge of the Risk Outlook Report of the Risk Outlook Report Reviews the functional risk registers and overall adherence to the Risk FINANCIAL STATEMENTS and Assurance Framework and Processes. Reviews challenges the Principal Risks.

Reviews Risk Outlook Report

FUNCTIONAL RISK REGISTERS FLOW OF Reported to the Risk and Assurance FUNCTIONAL RISK Team and collated into the Risk INFORMATION Outlook Report on a quarterly basis.

Purpose of the Group with regard to risk

The flow of the risk-review process

ANNUAL REPORT AND ACCOUNTS 2019 61 OUR PRINCIPAL RISKS

The risks outlined are the principal strategic, corporate and operational risks identified during the year. This is a current point-in-time assessment of the risk profile that the Group faces as at 31 December 2019. As the risk environment evolves these risks are being constantly reviewed and updated.

PRINCIPAL RISK Climate change A safe and secure Ability to access finance Enable capacity – airspace Information security Regulation requirements Obtaining a development External change Political environment Ineffective organisation – Competition and carbon targets operating environment and surface access consent order and innovation systems/people

REAS ABL ABL REAS REAS REAS REAS ABL ABL REAS REAS C E ST E ST E C E C E C E C E ST E ST E C E C E N D N D N D N D N D N D N D I I I I I I I

R R R R R R R R R R R I T I T I T I T I T I T I T I T I T I T I T SK C SK C SK C SK C SK C SK C SK C SK C SK C SK C SK C / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A / IM P A

DETAIL Climate-related risk has been split We have a statutory and moral We need to continue to be able To enable growth, changes to Information security, primarily We are currently subject to We are operating our two runways The technological world is Our expansion of the airport Systems We compete against other into two areas: responsibility to ensure that we to access finance to fund our airspace capacity are required to at risk of malicious cyber-attack economic regulatory review. at close to full capacity. Failure to constantly changing; new is reliant on political support. airports both within the UK and We are constantly adapting to our safeguard the welfare and safety of current operations and future be granted. External stakeholders is a continued risk given the size secure the necessary Development innovations have changed the way across the world for passengers; Physical risks – Heathrow’s Changes to economic regulation Changes to the government, and internal and external requirements. our people, business partners and expansion plans. who influence this process include: and breadth of our network and Consent Order for the third runway consumers do business. some make marginal choices, operational resilience to the impact could materially impact the therefore to government priorities, As we continue to grow, existing the public who may be affected by residents, government and external operating environment. could lead to increased congestion, particularly connecting passengers, of climate change. performance of the business. Our stakeholders are impacted by can impact material decisions that systems and processes become our activities. lobbying bodies. In addition, to passenger delay and lack of about which route to fly. We such innovations and there is a risk are taken by us. unsuitable and need to evolve to and enable the desired growth, access Failure to comply with laws and opportunity for the UK. are also in competition against Failure to operate a safe we do not evolve our proposition to meet the needs of our business. to the airport must be increased in regulations could result in loss The UK referendum decision on other business in the UK for Transitional risks – the inability environment risks damage meet new demands. a sustainable way. of licence, penalties, claims and Brexit has the potential to impact finite resources, infrastructure to meet our obligations as a to the health and wellbeing People litigation, reputational damage and airline operations which may cause development potential and political responsible business regarding of a stakeholder, operational There is a risk that changes to loss of stakeholder confidence. disruption to our passengers, We rely on our people to ensure will; all of which will be required our own and UK/global carbon disruption, inconvenience to airspace capacity are not granted impact immigration, cargo that we operate effectively. External to successfully expand. With targets which could result in passengers and long-term damage and that demands for surface operations, our supply chain, and internal requirements put expansion, consideration continues fines, reputational damage and to our reputation. access cannot be met. and our people. pressure on colleagues and, during to be given to third party proposals negatively impact expansion plans. The UK threat level is substantial. Inability to meet Surface Access 2019, there was the additional risk to build and/or operate parts of the These risks are as discussed further We are responsible for ensuring thresholds set in the ANPS would of a threat of industrial action. airport infrastructure. in the TCFD section on page 67. that our assets, infrastructure, mean an inability to release ATMs human and electronic systems and under ‘Environmentally Managed processes meet requirements to Growth’ framework. protect aviation security, deliver high security standards and build confidence with regulators, airlines and passengers.

RISK MITIGATION STRATEGY Sustainability has been embedded Our safety management We produce long-term forecasts The potential capacity restraints We are implementing an improved The risk of an adverse outcome We have put in place a robust We review external markets We continue to make a strong Systems As we remain under pressure to into all governance structures system includes risk assessment which include consideration of are a key priority within the cyber-security programme to from economic regulatory reviews process to ensure that we comply and innovation initiatives to case for Heathrow’s place in stay affordable, our commercial We continuously review systems within Heathrow. processes for all activities that significant downside risk to enable expansion and commercial comply with ISO 27001 Information is mitigated as far as possible with the planning process. Extensive ensure we understand their impact, aviation and the wider economy strategies are important in retaining and processes to ensure they have significant risk and ensures our management to conclude that functions which have dedicated Security. Mandatory training has by a dedicated regulatory team stakeholder surveys take place to mitigate the risk and embrace and the part it plays in Global key passenger groups. Having Proactive environmental meet the needs of our business. proportionate control measures covenant terms are likely to be teams, with robust workstreams, been rolled out, and multiple which ensures full compliance ensure that we listen and respond to change, working alongside our Britain, and we explain the benefits a structure to ensure ease of management systems and Where benefits exceed the cost, are used. Governance, led by our met, and that we have the ability working directly with key awareness campaigns have been with regulatory requirements, our communities’ and stakeholders’ stakeholders as required. that expansion will bring. Whilst access to reasonably priced public employee training programmes we invest in new systems. In the senior management teams, and to access additional future finance stakeholders to develop proposals initiated which will continue establishes a sound relationship needs and concerns. We remain of a change in the government’s transport routes in and out of the occur within all of our operations Emerging risks from external current year we have launched a assurance processes are used as required. and strategies to increase capacity. throughout 2020. with the regulator and advises the the view that a robust process was focus cannot be controlled, risk airport will also be important. which set clear environmental change are also included in project to upgrade our financial to ensure that controls around Executive Committee and HAHL applied to the designation of the is monitored and proposed strategies and resource We have invested in a suitably Delay in the delivery of surface our Executive Team’s review of system to support working in a To build and maintain the coalition health-and-safety risks remain Board1 on regulatory matters. Airports National Policy Statement, mitigating actions agreed in conservation initiatives. skilled Treasury and Investment access and airspace changes could emerging risks as part of the risk- simpler, easier, more agile and cost- of support for our expansion, we effective and continuous including the extensive evidence advance where necessary. team who have robust procedures defer or reduce the release of ATMs The regulatory framework requires management process. effective way. must emphasise our economic We have launched Heathrow 2.0 improvement is encouraged. gathered by the independent in place to ensure that the best and reduce the ability to monetise formal engagement with airline We have established a cross- importance to the UK and and work closely across functions Airports Commission, multiple In the current year our safety quality investment decisions are the benefits of expanded capacity. customers. All airlines are invited functional Brexit team, reporting to People demonstrate that our expansion is to ensure sustainable growth is rounds of public consultation improvement team has initiated made, and that investments can be to be represented on engagement the Executive Committee and HAHL compatible with the UK’s climate achieved. We are reducing carbon and the overwhelming vote in We continue to invest in our a new ‘4 pillar’ safety plan which appropriately financed. forums – for example joint Board1, which has implemented change policy. emissions that we control, and our Parliament. We will continue to people and have a strategy to is designed to improve the steering groups. In addition, key a structured approach to the airport operations have become Realisation of Principal and other communicate externally the benefits ensure the development of talent. When considering any third fundamental building blocks of a stakeholders are engaged on a identification and management of carbon-neutral. We are working risks could deteriorate quality of a third runway and sustainable Policies are in place to engage party proposals we will work safe operating environment. The joint planning basis which provides all risks related to Brexit. towards achieving zero-carbon of our credit rating and increase growth at Heathrow for the whole and motivate our colleagues so with relevant authorities, and overall Operational Health and the opportunity to air views and airport infrastructure by the mid this risk. of the UK. At midnight on 31 January 2020, they are excited and challenged independently, to ensure scrutiny. Safety Policy has also been updated share plans, thereby ensuring 2030s, while working with the the UK formally left the EU and the by their work environment and Our primary focus is to ensure there and improved. their ongoing requirements are The Court of Appeal judgement aviation industry to reach net-zero withdrawal agreement came into accountable and compliant with would be no degradation to the articulated and understood. is awaited on the current judicial emissions from all flights departing We work with government force. From 1 February 2020, the internal governance, policies and experience of our passengers and review proceedings against the the UK by 2050. agencies to ensure security It has been concluded expansion UK entered a transition period until procedures. We provide great colleagues and that continuity of Secretary of State for Transport procedures are appropriate is probable and therefore it is 31 December 2020 to negotiate career opportunities, development safe, secure and efficient airport relating to the Government’s and mitigate evolving threats. appropriate to have recognised trade and other areas with the and training, retaining talent and operations is maintained in the decision to designate the Airports Procedures are subject to review £450m of spend to date as an EU. During this transition period, knowledge and preventing single interests of all air transport users, National Policy Statement. If the through the internal controls asset in the course of construction, travel arrangements will continue points of failure. We were pleased whilst allowing the timely privately ANPS is set aside in the event of an mechanism and via independent current spending plans forecast the as normal. that unions recently accepted a financed delivery of expansion adverse court judgement against scrutiny from the CAA. investment will continue growing in revised pay deal. in compliance with all ANPS the Secretary of State, and the We have made preparations to 2020 to c£1bn. There is regulatory requirements. likelihood of expansion occurring ensure the continued safe and uncertainty in the short term due was no longer probable, up to secure operation for passengers We will seek assurance that due to an upcoming decision from the £450 million of the capital with a plan jointly created process is followed by any such CAA on the proposed regulatory expenditure spent as at 31 with stakeholders to deliver a third party, with an equivalent framework and completion of December 2019 would be required predictable and appropriate level of rigour, independent a judicial review of the Airports to be impaired and expensed to the passenger experience which scrutiny, comprehensive National Policy Statement. If as a income statement. minimises the pre and post consultation and constructive result of either of these events, Brexit impacts. engagement as has been the case expansion was reassessed as with our expansion programme. being no longer considered probable, expansion related capital investment would be required to be impaired and expensed to the income statement.

LINK TO STRATEGIC PRIORITIES

T T T T T T T T T

E E E E E E E E R E R R R R R R R R

A C A C A C A C A C A C A C A C A C

I I I I I I I I I N N N N N N N N N V S V S V S V V S V V V V S S R U S R U S R U S R S R U S R S R S R S R U F H F H F H F F H F F F F H O E S T O E S T O E S T O E O E S T O E O E O E O E S T B S T S B T B S T B S B B S T B S B S B S B S T E R R A W R R E A W E R R A W E R R E E R R A W E R R E R R E R R E R R A W A AN M E IN O M E A AN IN O A AN M E IN O A AN M E A AN A AN M E IN O A AN M E A AN M E A AN M E A AN M E IN O T THE PL CUSTOM ABLE GR MOJO CUSTOM MOJO T THE PL ABLE GR MOJO T THE PL CUSTOM ABLE GR T THE PL CUSTOM T THE PL MOJO T THE PL CUSTOM ABLE GR T THE PL CUSTOM MOJO T THE PL CUSTOM MOJO T THE PL CUSTOM T THE PL CUSTOM ABLE GR

62 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

REAS ABL ABL REAS REAS REAS REAS ABL ABL REAS REAS C E ST E ST E C E C E C E C E ST E ST E C E C E N D N D N D N D N D N D N D I I I I I I I

DETAIL Climate-related risk has been split We have a statutory and moral We need to continue to be able To enable growth, changes to Information security, primarily We are currently subject to We are operating our two runways The technological world is Our expansion of the airport Systems We compete against other into two areas: responsibility to ensure that we to access finance to fund our airspace capacity are required to at risk of malicious cyber-attack economic regulatory review. at close to full capacity. Failure to constantly changing; new is reliant on political support. airports both within the UK and We are constantly adapting to our safeguard the welfare and safety of current operations and future be granted. External stakeholders is a continued risk given the size secure the necessary Development innovations have changed the way across the world for passengers; Physical risks – Heathrow’s Changes to economic regulation Changes to the government, and internal and external requirements. our people, business partners and expansion plans. who influence this process include: and breadth of our network and Consent Order for the third runway consumers do business. some make marginal choices, operational resilience to the impact could materially impact the therefore to government priorities, As we continue to grow, existing the public who may be affected by residents, government and external operating environment. could lead to increased congestion, particularly connecting passengers, of climate change. performance of the business. Our stakeholders are impacted by can impact material decisions that systems and processes become our activities. lobbying bodies. In addition, to passenger delay and lack of about which route to fly. We such innovations and there is a risk are taken by us. unsuitable and need to evolve to and enable the desired growth, access Failure to comply with laws and opportunity for the UK. are also in competition against Failure to operate a safe we do not evolve our proposition to meet the needs of our business. to the airport must be increased in regulations could result in loss The UK referendum decision on other business in the UK for Transitional risks – the inability environment risks damage meet new demands. GOVERNANCE REPORT a sustainable way. of licence, penalties, claims and Brexit has the potential to impact finite resources, infrastructure to meet our obligations as a to the health and wellbeing People litigation, reputational damage and airline operations which may cause development potential and political responsible business regarding of a stakeholder, operational There is a risk that changes to loss of stakeholder confidence. disruption to our passengers, We rely on our people to ensure will; all of which will be required our own and UK/global carbon disruption, inconvenience to airspace capacity are not granted impact immigration, cargo that we operate effectively. External to successfully expand. With targets which could result in passengers and long-term damage and that demands for surface operations, our supply chain, and internal requirements put expansion, consideration continues fines, reputational damage and to our reputation. access cannot be met. and our people. pressure on colleagues and, during to be given to third party proposals negatively impact expansion plans. The UK threat level is substantial. Inability to meet Surface Access 2019, there was the additional risk to build and/or operate parts of the These risks are as discussed further We are responsible for ensuring thresholds set in the ANPS would of a threat of industrial action. airport infrastructure. in the TCFD section on page 67. that our assets, infrastructure, mean an inability to release ATMs human and electronic systems and under ‘Environmentally Managed processes meet requirements to Growth’ framework. protect aviation security, deliver high security standards and build confidence with regulators, airlines and passengers.

RISK MITIGATION STRATEGY Sustainability has been embedded Our safety management We produce long-term forecasts The potential capacity restraints We are implementing an improved The risk of an adverse outcome We have put in place a robust We review external markets We continue to make a strong Systems As we remain under pressure to into all governance structures system includes risk assessment which include consideration of are a key priority within the cyber-security programme to from economic regulatory reviews process to ensure that we comply and innovation initiatives to case for Heathrow’s place in stay affordable, our commercial We continuously review systems within Heathrow. processes for all activities that significant downside risk to enable expansion and commercial comply with ISO 27001 Information is mitigated as far as possible with the planning process. Extensive ensure we understand their impact, aviation and the wider economy strategies are important in retaining and processes to ensure they have significant risk and ensures our management to conclude that functions which have dedicated Security. Mandatory training has by a dedicated regulatory team stakeholder surveys take place to mitigate the risk and embrace and the part it plays in Global key passenger groups. Having Proactive environmental meet the needs of our business. proportionate control measures covenant terms are likely to be teams, with robust workstreams, been rolled out, and multiple which ensures full compliance ensure that we listen and respond to change, working alongside our Britain, and we explain the benefits a structure to ensure ease of management systems and Where benefits exceed the cost, are used. Governance, led by our met, and that we have the ability working directly with key awareness campaigns have been with regulatory requirements, our communities’ and stakeholders’ stakeholders as required. that expansion will bring. Whilst access to reasonably priced public employee training programmes we invest in new systems. In the senior management teams, and to access additional future finance stakeholders to develop proposals initiated which will continue establishes a sound relationship needs and concerns. We remain of a change in the government’s transport routes in and out of the occur within all of our operations Emerging risks from external current year we have launched a assurance processes are used as required. and strategies to increase capacity. throughout 2020. with the regulator and advises the the view that a robust process was focus cannot be controlled, risk airport will also be important. which set clear environmental change are also included in project to upgrade our financial to ensure that controls around Executive Committee and HAHL applied to the designation of the is monitored and proposed strategies and resource We have invested in a suitably Delay in the delivery of surface our Executive Team’s review of system to support working in a To build and maintain the coalition health-and-safety risks remain Board1 on regulatory matters. Airports National Policy Statement, mitigating actions agreed in conservation initiatives. skilled Treasury and Investment access and airspace changes could emerging risks as part of the risk- simpler, easier, more agile and cost- of support for our expansion, we effective and continuous including the extensive evidence advance where necessary. team who have robust procedures defer or reduce the release of ATMs The regulatory framework requires management process. effective way. must emphasise our economic We have launched Heathrow 2.0 improvement is encouraged. gathered by the independent in place to ensure that the best and reduce the ability to monetise formal engagement with airline We have established a cross- importance to the UK and and work closely across functions Airports Commission, multiple In the current year our safety quality investment decisions are the benefits of expanded capacity. customers. All airlines are invited functional Brexit team, reporting to People demonstrate that our expansion is to ensure sustainable growth is rounds of public consultation improvement team has initiated made, and that investments can be to be represented on engagement the Executive Committee and HAHL compatible with the UK’s climate achieved. We are reducing carbon and the overwhelming vote in We continue to invest in our a new ‘4 pillar’ safety plan which appropriately financed. forums – for example joint Board1, which has implemented change policy. emissions that we control, and our Parliament. We will continue to people and have a strategy to is designed to improve the steering groups. In addition, key a structured approach to the airport operations have become Realisation of Principal and other communicate externally the benefits ensure the development of talent. When considering any third fundamental building blocks of a stakeholders are engaged on a identification and management of carbon-neutral. We are working risks could deteriorate quality of a third runway and sustainable Policies are in place to engage party proposals we will work safe operating environment. The joint planning basis which provides all risks related to Brexit. towards achieving zero-carbon of our credit rating and increase growth at Heathrow for the whole and motivate our colleagues so with relevant authorities, and overall Operational Health and the opportunity to air views and airport infrastructure by the mid this risk. of the UK. At midnight on 31 January 2020, they are excited and challenged independently, to ensure scrutiny. Safety Policy has also been updated share plans, thereby ensuring 2030s, while working with the the UK formally left the EU and the by their work environment and Our primary focus is to ensure there and improved. their ongoing requirements are aviation industry to reach net-zero On 27 February 2020, the Court of withdrawal agreement came into accountable and compliant with would be no degradation to the articulated and understood. emissions from all flights departing We work with government Appeal concluded that the force. From 1 February 2020, the internal governance, policies and experience of our passengers and the UK by 2050. agencies to ensure security It has been concluded expansion is Government must take account of UK entered a transition period until procedures. We provide great colleagues and that continuity of FINANCIAL STATEMENTS procedures are appropriate probable and therefore it is the Paris Climate Agreement in the 31 December 2020 to negotiate career opportunities, development safe, secure and efficient airport and mitigate evolving threats. appropriate to have recognised Airports National Policy Statement trade and other areas with the and training, retaining talent and operations is maintained in the knowledge and preventing single Procedures are subject to review £450m of spend to date as an asset (‘ANPS’). The Government declined EU. During this transition period, interests of all air transport users, points of failure. We were pleased through the internal controls in the course of construction. to appeal to the Supreme Court travel arrangements will continue whilst allowing the timely privately mechanism and via independent as normal. that unions recently accepted a financed delivery of expansion There is regulatory uncertainty in directly, and as a result, Heathrow scrutiny from the CAA. revised pay deal. in compliance with all ANPS the short term due the upcoming and other interested parties have We have made preparations to requirements. Post year end the emergence and review of the Court of Appeal applied for a review of the Court of ensure the continued safe and spread of the coronavirus is a new ruling. If as a result of this event or Appeal ruling. If as a result of this secure operation for passengers We will seek assurance that due risk. We are carefully monitoring any other event, expansion was event or any other event, expansion with a plan jointly created process is followed by any such developments to understand the reassessed as being no longer was reassessed as being no longer with stakeholders to deliver a third party, with an equivalent potential risks to our business and considered probable, expansion considered probable, expansion predictable and appropriate level of rigour, independent stakeholders. We will take suitable related capital investment would related capital investment would be passenger experience which scrutiny, comprehensive mitigating actions where they be required to be impaired and required to be impaired and minimises the pre and post consultation and constructive are available and provide further expensed to the income statement. expensed to the income statement. Brexit impacts. engagement as has been the case updates to our stakeholders as the with our expansion programme. situation develops. Trading updates can be found on our website as part of our annual outlook communication, quarterly results and semi-annual investor reports.

LINK TO STRATEGIC PRIORITIES

T T T T T T T T T

E E E E E E E E R E R R R R R R R R

A C A C A C A C A C A C A C A C A C

1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 78.

ANNUAL REPORT AND ACCOUNTS 2019 63 TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD)

In June 2017, the Financial Stability GOVERNANCE Climate change poses a risk to our business and it is a Board released its final report on the standing item on the HAHL Board’s1 agenda. recommendations of the Task Force The HAHL Board1 receives monthly updates on climate strategy from the Sustainability and Environment Director, and on Climate-related Financial Disclosures. climate change is included as an agenda item at Board and We recognise the importance of Executive strategy days. The HAHL Board1 reviews principal risks that have been these disclosures and are committed reviewed by the Executive Committee, Sustainability to implementing the recommendations and Operational Risk Committee and Risk and Assurance Committee. in full. Climate change is also a standing agenda item at the We have included information in various parts of this report Sustainability and Operational Risk Committee, a sub- 1 relating to how we are managing our climate impact and how committee of the HAHL Board and chaired by an our business is evolving in response to the risks we see arising Independent Non-Executive Director. Its members include the from climate change. Chief Executive Officer and three shareholder Non-Executive Directors. Its responsibilities include: We are a member of the Prince of Wales Accounting for Sustainability Project (A4S) and we have adopted the A4S • Reviewing Heathrow’s policies, conduct, performance and maturity criteria to assess and benchmark our progress in risk-management approach against sustainability goals and implementing the TCFD recommendations. We have achieved operational activities. an ‘intermediate level’ of maturity in our first year and will aim • Reviewing and challenging the performance and conduct of to apply all of the recommendations of the Task Force in our Heathrow relating to operational risks and the delivery of 2020 report. We will continue to refine our approach sustainability goals. thereafter as our understanding of the financial risks and • Monitoring and challenging the appropriateness of opportunities of climate change become clearer. sustainability and operational risk-assurance strategies The table on page 66 shows how our disclosures map against and plans, the execution and results of such plans, and the TCFD recommendations and where relevant information relevant communications. can be found in this report. In partnership with the Cambridge University Institute of Sustainable Leadership, we are funding a research fellow who will undertake world-leading research on climate-risk scenario analysis. The research project is focused on the nexus of Physical and Transition risk and the findings will help to improve both the aviation industry’s understanding, and its ability to assess, the risks that climate change will bring to aviation and airports.

1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 78.

64 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

STRATEGY One of our four strategic priorities is Sustainable Growth and our Heathrow 2.0 sustainability plan, launched in 2017, sets out how we will deliver this priority. Heathrow 2.0 is integrated within our overall business strategy and business plan. More information is available in the ‘Our commitment to sustainable growth’ section of this report. The full Heathrow 2.0 plan is available at https://www.heathrow.com/company/ about-heathrow/heathrow-2-0-sustainability-strategy.

Climate change is a significant sustainability issue for aviation GOVERNANCE REPORT and therefore it is a theme that runs throughout Heathrow 2.0. We have committed to decarbonising our infrastructure and we are working towards becoming a zero carbon airport by the mid 2030s. We are also taking a leading role in promoting a net-zero carbon target for the aviation industry, and supporting airlines, manufacturers and other stakeholders to decarbonise air travel. We have summarised below the parts of the Heathrow 2.0 plan that address aspects of climate change: Objective 3 - Empowering our colleagues to deliver change. Objective 5 - Addressing the challenges of vehicles and passenger transportation. Objective 7 - Increasing UK access to Heathrow via sustainable means and addressing climate change adaptation. Objective 9 - Reducing carbon emissions in our supply chain and supplier adaptation to climate change. Objective 10 – Tackling carbon emissions in our infrastructure and operating a zero-carbon airport before 2050. FINANCIAL STATEMENTS Objective 11 - Tackling carbon emissions from aviation. Heathrow 2.0 covers our own business as well as the role we will play in driving change across the wider industry. It shows how we aim to go beyond mitigation and deliver positive impacts that enable us and those around us to thrive.

ANNUAL REPORT AND ACCOUNTS 2019 65 TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD) (CONTINUED)

Disclosure recommendation Section Reference Page

Governance

Describe the Board’s oversight of climate-related Our commitment to sustainable growth 30 risks and opportunities How we manage our risks 60-61

Describe management’s role in assessing and managing Our commitment to sustainable growth 30 climate-related risks and opportunities How we manage our risks 60-61

Strategy

Describe the climate-related risks and opportunities the organisation TCFD 67-71 has identified over the short, medium and long term

Describe the impact of climate-related risks and opportunities on the Our commitment to sustainable growth 30 organisation’s businesses, strategy and financial planning TCFD 65

Describe the resilience of the organisation’s strategy, taking into consideration different future climate scenarios, TCFD 67-71 including a 2°C or lower scenario

Metrics

Disclose the metrics used by the organisation to TCFD 66 assess climate-related risks and opportunities

Disclose Scope 1, Scope 2 and, if appropriate, Scope Our commitment to sustainable growth 42 3 greenhouse gas emissions, and the related risks

Describe the targets used by the organisation to manage climate- Our commitment to sustainable growth 38-43 related risks and opportunities and performance against targets.

Risk

Describe the organisation’s processes for identifying Our commitment to sustainable growth 30 and assessing climate-related risks. How we manage our risks 60-61

Describe the organisation’s processes for managing Our commitment to sustainable growth 30 climate-related risks Our principle risks 62

Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s How we manage our risks 60-61 overall risk management

METRICS AND TARGETS We have publicly committed to setting a climate-science- We have included a number of relevant carbon metrics in the aligned target using the Science Based Targets initiative (SBTi) sustainability review section on page 42. In addition, we criteria. We are currently developing carbon targets that are disclose progress against our ten Heathrow 2.0 flagship goals. aligned to limiting temperature rises to 1.5 degrees. Our More detailed progress updates for individual goals and targets will be published in 2020. targets are available in our sustainability reports published on our website. The 2019 Sustainability Report will be published later in 2020.

66 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

CLIMATE-RELATED RISKS In the table below, we have summarised the climate-related Our assessment of climate-related financial risks has been risks that could have a material effect on Heathrow along aligned to two climate-related scenarios as follows: with our initial assessment of the relative significance of each risk to our business. Our assessment of physical risks under 1. A 1.5°C scenario. This is the most optimistic outcome based both 1.5°C and 3.5°C scenarios has been informed by our on recent Intergovernmental Panel on Climate Change ‘Climate Change Adaptation and Resilience report’ available (IPCC) reports, which envisages a full and global transition at www.heathrow.com/content/dam/heathrow/web/ to a low-carbon economy by 2100. In order to achieve this common/documents/company/heathrow-2-0-sustainability/ scenario, the global economy must achieve net-zero carbon futher-reading/climate-change-adaptation-report-2016.pdf. emissions by 2050 according to the IPCC’s analysis. More work is required to fully understand and assess each risk 2. A 3.5°C scenario. This scenario is a projection of how in detail. In the following pages we explain the risks, how they much the world will be warmed by 2100 based on current apply to Heathrow and what we are doing to mitigate the trends and practices (if no further action is taken to mitigate risks and their effects. climate change). GOVERNANCE REPORT

1.5 Degree 3.5 Degree Scenario Scenario

Physical Risks Description Inherent risk Inherent risk rating rating

Property Physical damage to Heathrow property due to extreme weather events.

Operations Increased operational costs and increased flight disruption.

Network Changes to profitability of flight routes and unfavourable changes to Heathrow network.

Destinations Change in demand for certain flight destinations due to a changing local climate.

Transition Risks Description Inherent risk Inherent risk rating rating

Technology The adoption of new technologies and the increasing use of alternative fuels by airlines require investment in changes to current airport FINANCIAL STATEMENTS infrastructure.

Market Reduced demand for air travel due to changing customer sentiment. Increased competition from lower-carbon modes of transport.

Carbon policy Carbon policies, including taxes that will lead to increased ticket pricing; and regulations carbon caps, limiting airport growth.

Reputation Passengers and investors show a preference for airlines and airports with smaller climate impacts affecting market share and the cost of capital.

Inherent risk rating Lower inherent risk – Risk is unlikely to have a significant impact on the aviation sector or wider economy.

Mid inherent risk – Risk could have a measurable impact on the aviation industry or wider economy.

Higher inherent risk – Risk could have severe impacts on the industry or wider economy.

ANNUAL REPORT AND ACCOUNTS 2019 67 TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD) (CONTINUED) PHYSICAL RISKS Operations

RISK DESCRIPTION Property • Increased frequency of extreme weather events, such as heavy rainfall and storms, could result in unfavourable conditions for the operation of aircraft and runways. These may result in delays RISK DESCRIPTION and/or cancellations. Our assets may be subject to damage in the event of • Extreme weather events such as flooding or wind have extreme weather. Climate change could result in: the potential to cause damage to critical infrastructure, • Increased risk of surface and/or structural failure. including the electricity network, roads and connecting rail transport. • Impeded accessibility due to impacts on road and rail network. • Increased risk of flooding and water quality impacts. AVIATION CONTEXT • Overheating of buildings and aircraft and an increased • High winds, turbulence and a stronger jet stream risk of fire on hot days. could increase delays, maintenance requirements and fuel burn. • Airlines have already noticed a material increase in AVIATION CONTEXT cancellations and supply-chain disruptions due to • Predicted rises in mean temperatures could see a rise of more frequent hurricanes. up to 7.1°C in mean summer temperature and a 60% increase in annual heavy rainfall days. CONSIDERATIONS FOR HEATHROW • Both would require improvements in environmental risk management at a local level, particularly fire, flooding and • The main risk to Heathrow is an increased operating water quality impacts. cost to manage more frequent periods of disruption. Under a 3.5°C scenario the projected increased • The cost of making these improvements would be frequency of storms and hurricanes may present a higher under a 3.5°C scenario compared to a 1.5°C material operational risk for long-haul flights departing scenario, where current provisions are largely adequate. from, or arriving at, Heathrow.

CONSIDERATIONS FOR HEATHROW • According to DEFRA data, Heathrow is in an area of low subsidence risk and is not particularly exposed to groundwater swells, also it is not coastal. These factors insulate it well from flood risk overall. • APOC is an operational control centre set up in 2014 that allows Heathrow to respond rapidly to changing conditions enhancing preparedness.

68 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Network

RISK DESCRIPTION • Climate-change impacts may result in increased turbulence or unfavourable flying conditions that may affect the routing, attractiveness or viability of some Destinations flight paths.

AVIATION CONTEXT RISK DESCRIPTION • The global aviation network is complex and • The long-term impacts of changing weather patterns interconnected and changes to routing decisions may influence the attractiveness (and even existence) cannot currently be predicted with any certainty. of certain destinations.

• This risk is more impactful for airlines than airports, • Impacts, such as rising sea levels, changing GOVERNANCE REPORT as they may have to consider alternative routes due temperatures, flooding, droughts, forest fires, heat to climate-change factors. waves and reduced snow cover in ski destinations could impact customer demand. • Climate change could also make certain destinations CONSIDERATIONS FOR HEATHROW more attractive or accessible to visitors, for example a • Network changes could affect Heathrow’s route longer summer season in some countries. network, flight schedules and the duration of flights. • There is potential for more routes to require transfers AVIATION CONTEXT via hub airports such as Heathrow if weather patterns render some routes prohibitive, but this is unpredictable • In a 3.5°C scenario, many destinations become and difficult to quantify. untenable or less attractive as travel destinations because they are exposed to a higher risk of extreme weather events, especially hurricanes. • More broadly, this scenario is likely to involve significant challenges for the global economy and hence impacts on demand for aviation. • A 1.5°C scenario would see comparatively minimal change in the makeup of destinations from today.

CONSIDERATIONS FOR HEATHROW • Some Heathrow destinations may see fewer visitors as FINANCIAL STATEMENTS they suffer from the negative effects of climate-change. There may be an increase in travel to other destinations as the climate becomes warmer. • The broad range of global destinations that Heathrow serves mitigates the impact of this risk to some degree.

ANNUAL REPORT AND ACCOUNTS 2019 69 TASK FORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD) (CONTINUED) TRANSITION RISKS Market

RISK DESCRIPTION • Passengers may become more concerned about the environment and carbon emissions associated with flying. Technology • Passengers may start to prefer alternative forms of transportation. • Passengers may choose to fly shorter distances, thereby affecting Heathrow’s existing network. RISK DESCRIPTION • Some businesses are already adopting virtual meetings • Companies may consider increasing the use of as an alternative communications method which may alternative/sustainable fuels in order to reduce their lessen the need for business travel. impact on the climate requiring supply chain and infrastructure changes. • The development of electric aircraft technology is AVIATION CONTEXT evolving and there is growing interest from airlines • Although the impact on overall market demand is still which may require investment in electrical infrastructure. limited, awareness of the ‘flygskam’/flight shaming movement is growing as some consumers opt for more sustainable forms of transportation such as rail. AVIATION CONTEXT • Growth in this public sentiment may encourage • The increasing use of sustainable aviation fuels by regulators to target the industry with taxes airlines will require supply-chain and infrastructure and legislation. changes. Significant infrastructure changes at airports are not anticipated to increase the uptake of sustainable aviation fuels. Sustainable aviation fuels will require CONSIDERATIONS FOR HEATHROW carefully considered policy support to overcome • As a hub airport, Heathrow provides a substantial current production and price hurdles and avoid amount of long-haul connectivity which is not easily unintended consequences. substituted by other modes of transport. • There is currently limited but growing understanding of • However, rail is likely to provide an alternative to some the infrastructure requirements to support the adoption domestic and short-haul journeys where good of electric aircraft. alternative services are available. • It is assumed that the majority of the cost of technology • There is an opportunity to differentiate our brand by transition will fall to airlines and aircraft manufacturers showing leadership, innovation and action to mitigate and will ultimately be paid by passengers. climate impacts.

CONSIDERATIONS FOR HEATHROW • We will need to ensure that we are capable of quickly adapting to the evolving technological and commercial needs of airlines. • Our approach to supporting decarbonisation of aviation addresses cleaner aircraft technology and sustainable fuels; including a review of potential infrastructure requirements and incentives for airlines.

70 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Carbon policy & regulation

RISK DESCRIPTION • Governments often seek to address emissions through policies to price carbon, including emissions trading schemes. The cost of carbon emissions to private companies has continued to rise globally, especially in the EU. • Over time, carbon prices are likely to rise, potentially significantly. This will stimulate the development of Reputation cleaner technologies and fuels but may also have an impact on demand for aviation. • If UK and/or European policy moves significantly ahead of international approaches could lead to a sustained RISK DESCRIPTION competitive disadvantage for UK aviation. • Increasing awareness about the role of air GOVERNANCE REPORT transportation in climate change is likely to lead to stakeholders becoming more concerned about AVIATION CONTEXT environmental impacts of flying. They may demonstrate • Climate policy is a significant potential risk for a greater preference for airports and airlines with the industry. smaller environmental impacts. • Airlines face significant financial risk from carbon • Investors are increasingly embedding environmental, taxation and regulation which may impact their social and governance (ESG) considerations into continued ability to operate profitably. investment decisions. This may affect the attractiveness • If higher carbon prices are passed on to passengers, of investments in more carbon-intensive industries, they have the potential to impact future demand including air travel. for flights. • Potential aviation demand-management policies are being discussed in the UK and a number of countries AVIATION CONTEXT in Europe. If not properly designed these policies • Consumer behaviour is an opportunity as well as a could potentially have a significant impact on risk; passengers could be attracted to specific airlines passenger demand without directly incentivising or airports if they establish a place in the market by decarbonisation of the sector. demonstrating investment, innovation and action to mitigate climate impacts. CONSIDERATIONS FOR HEATHROW • Our local competitors are subject to the same carbon CONSIDERATIONS FOR HEATHROW

regulations, prices and frameworks. FINANCIAL STATEMENTS • ESG restrictions or criteria may lead to Heathrow • As part of the Airports National Policy Statement that becoming a less attractive investment and as a result supports expansion at Heathrow we are required to may increase our cost of capital. demonstrate that expansion would not result in a material increase in the UK’s carbon emissions. • A reduction in overall UK air traffic due to carbon reduction efforts is considered more likely to affect markets that cater for domestic or short-haul flights, as journeys are more easily substituted by alternatives.

ANNUAL REPORT AND ACCOUNTS 2019 71 SECTION 172(1) STATEMENT

Section 172 of the Companies Act 2006 requires a director of issues than by working alone as an individual company. For a company to act in the way he or she considers, in good details of some of the engagement that takes place at an faith, would most likely promote the success of the company operational or HAHL Group level with the Company’s for the benefit of its members as a whole. stakeholders, so as to encourage the directors to understand the issues to which they must have regard, please see the In doing so section 172 requires a director to have regard HAHL stakeholder table on the following pages. (amongst other matters) to: During the period we received information to help us a. The likely consequences of any decisions in the long-term. understand the interests and views of the Company’s key b. The interests of the company’s employees. stakeholders and other relevant factors when making c. The need to foster the company’s business relationships decisions. This information was distributed in a range of with suppliers, customers and others. different formats including in reports and presentations on d. The impact of the company’s operations on the community our financial and operational performance, non-financial KPIs, and environment. risk, ESG (Environmental, social and corporate governance) matters and the outcomes of specific pieces of engagement e. The desirability of the company maintaining a reputation (for example, the results of customer and supplier surveys and for high standards of business conduct. focus groups). As a result of this we have had an overview of f. The need to act fairly as between members of the company. engagement with stakeholders and other relevant factors which allows us to understand the nature of the stakeholders’ In discharging our section 172 duty we, the directors of the concerns and to comply with our section 172 duty to promote Company, have regard to the factors set out above. We also success of the company. have regard to other factors which we consider relevant to the decision being made. We acknowledge that every decision we We set out below some examples of how we have had make will not necessarily result in a positive outcome for all of regard to the matters set out in section 172(1)(a) - (f) when our stakeholders. By considering the Company’s vision, discharging our section 172 duty and the effect of that on purpose and values together with its strategic priorities, as decisions taken by us. shown in our Strategic Framework on page 23, and having a process in place for decision-making we aim to ensure that KEY DECISIONS MADE BY THE DIRECTORS our decisions are consistent and predictable. OF THE COMPANY As is normal for large companies, we delegate authority for day-to-day management of the Company and its subsidiaries. 1) Capital allocation We do this through the Executive Committee. The Executive Each quarter the directors of the Company consider the Committee is responsible for the development of strategy, Group’s capital structure and capital allocation when related policies and their execution. The Executive Committee proposing dividends. Details of our approach to capital then engages the Board of Heathrow Airport Holdings Limited allocation are set out on page 56 where we explain our (the ‘HAHL Board’) in approving and overseeing execution of long-term approach to allocating capital and the payment the business strategy and related policies. The corporate of dividends. governance structure and group policies are set by the HAHL Board. We ensure that when we are applying these group In 2019 the directors of the Company recommended dividend policies we have due regard to our fiduciary duties and payments to Heathrow (AH) Limited of £421 million (2018: responsibilities. The Executive Committee also reviews health £483 million). In making this decision the Board considers a and safety, financial and operational performance, legal and range of factors. These include the long-term viability of the regulatory compliance, business strategy; key risks; Company, its expected cash flow and financing requirements, stakeholder-related matters; diversity and inclusivity; the strength of the Group’s balance sheet, the balance of environmental matters; and corporate responsibility. current and forecast distributable reserves (including stress- testing to key risks), the potential impact on credit metrics and The Company’s key stakeholders are its passengers, the ongoing need for the business to support the safe and communities and the environment, colleagues, airlines, efficient operations over the long term. investors, suppliers and commercial partners and regulators. The views of and the impact of the Company’s activities on 2) Borrowings those stakeholders are an important consideration for the As required, the directors of the Company review and approve directors when making relevant decisions for the HAHL commercial terms for borrowing. In approving terms, the Board’s approval. While there are cases where the Executive directors seek to ensure that appropriate funds are available Committee itself judges that it should engage directly with to continue to invest in airport services, at a minimal cost and certain stakeholder groups on certain issues, the size and for a suitable period of time. The final decision on borrowing spread of both our stakeholders and Heathrow Airport is approved by the HAHL Board following the Limited means that generally our stakeholder engagement recommendation from the Executive Committee. best takes place at the Heathrow Airport Limited (operational) or HAHL Group level. We find that, as well as being a more efficient and effective approach, this also helps us achieve a greater positive impact on environmental, social and other

72 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

KEY DECISIONS MADE BY THE HAHL BOARD has challenged our research and engagement work programme, aspects of the research, how we have interpreted 1) Colleague Relations Strategy the results and how we are reflecting them in our plans. To The HAHL Board reviewed Heathrow’s people performance date, we have completed approximately 30 additional measures for 2018 and discussed and approved the Colleague separate pieces of research specifically focused on the relations strategy for 2019, which is a key part of Mojo, our development of the H7 business plan and Masterplan and in number one business priority. The purpose of the Colleague response to feedback and challenges from the CCB. An relations strategy is to increase engagement levels by making example of such feedback that changed our approach is to improvements in the interests of the HAHL Groups’ enhance our definition of vulnerability to go further than just employees. The plans focused on three key areas; leadership, mobility issues and the standard Passengers with Restricted management capability and employee wellbeing. We have Mobility (PRM) legislation. The CCB suggested we followed continued to roll out our leadership development programme best practice from other sectors and helped us develop our ‘leading for Sustainable growth’ to all leaders in the HAHL new framework. Group. We have also developed a leadership framework with 4) Expansion and Masterplan the aim for managers to use it as an upskilling tool to build management capability. We have developed a systematic The HAHL Board reviewed Heathrow’s readiness to proceed through the M4 Masterplan gateway which formed the basis approach to health and wellbeing which is regularly reviewed GOVERNANCE REPORT and endorsed by the Sustainability and Operational Risk of our statutory Airport Expansion Consultation (AEC) held Committee. In 2019 we set up an employee engagement between June and September 2019. The M4 Masterplan also forum to provide additional voice for colleagues to raise and formed the basis of our Initial Business Plan for the 2020s, the discuss improvements with management. Feed-back from our purpose of which is outlined in Key Decision 3 above. The colleagues has resulted in a number of improvements being preferred Masterplan at this gateway was a detailed made, which include modernising rest room facilities for our description and illustration of our proposed scheme and operational colleagues, dedicating more space to enable provided a greater level of detail on the expansion of colleagues to meet regularly with management and the Heathrow for our communities, the environment, our development of a new mobile application that allows passengers, colleagues and airlines. As part of this review, the colleagues to book leave on the move and swap shifts. HAHL Board had oversight of our key AEC documentation, including our scheme development report (articulating how 2) Climate Strategy we arrived at the preferred Masterplan), construction The HAHL Board approved Heathrow’s climate strategy, proposals, future runway operations proposals, surface access which would enable the launch of Heathrow’s net zero plan proposals, earth growth proposals, and our economic in January 2020. The strategy means that Heathrow would be development framework. In addition, the HAHL Board had carbon-neutral, in respect of its own infrastructure, from oversight of our proposals for mitigating the effects of January 2020. This would be achieved through purchasing expansion, including our preliminary environmental green gas and offsetting our very low remaining emissions information report, plans for compensation, property policies, through UK natural climate solutions. For Sustainable and our environmentally managed growth framework. We Alternative Fuels, we will advocate a combination of a fuel received c.11,000 responses to our AEC which, together with mandate and APD/landing charge discounts. For offsetting, stakeholder feedback, will be used to inform our M5 we have launched a partnership with “CHOOOSE”, one of a Masterplan gateway and Development Consent Order new generation of consumer-focused offsetting platforms. application towards the end of 2020. FINANCIAL STATEMENTS We want every passenger travelling through Heathrow to 5) Brexit Contingency Planning have the opportunity to offset, however we plan do this in a way that we can step back as airlines step in. The HAHL Board approved Heathrow’s Brexit contingency planning, preparation and communication strategy. With each 3) Regulatory Strategy & IBP Brexit date, Heathrow made preparations for potential The HAHL Board approved Heathrow’s Initial Business Plan scenarios, including a no deal. Our planning engaged our for the 2020’s, which shows how we will deliver the global colleagues from the EU, supporting applications for settled connections that Britain needs in a way that is sustainable, status. Our communication strategy kept our stakeholders affordable, deliverable and financeable. The real prize for and customers informed. Our plans included close consumers will be lower airfares achieved by introducing engagement with local authorities for broader resilient greater competition and choice between airlines. The plan preparedness, sharing our operational plans for assurance to also supports our airline customers’ growing commitment to our local communities and any environmental impacts. We decarbonising and net-zero flight. The plan has been will continue to engage closely with our colleagues, developed using consumer and stakeholder insights. Horizon, stakeholders and local authorities to maintain robust plans an online community of 3007 current and 601 potential which incorporate changes as the negotiations progress. Our Heathrow users, has been central to our engagement contingency plans will continue to be updated and reviewed programme. The Consumer Challenge Board (CCB) has also by the HAHL Board in preparation for the next date as helped shape our consumer engagement strategy and Parliament and the EU negotiate on the final deal. provided independent challenge on the use of our consumer research and engagement in our business planning. The CCB

ANNUAL REPORT AND ACCOUNTS 2019 73 SECTION 172(1) STATEMENT (CONTINUED)

This section sets out the details of some of the engagement that takes place at an operational or HAHL Group level with the Company’s key stakeholders. Not all information is reported directly to the HAHL Board and not all engagement takes place directly with the HAHL Board. However, the output of this engagement informs business-level decisions, with an overview of developments and relevant feedback being reported to the HAHL Board and/or its committees.

PRINCIPAL RISK Passengers Communities and Colleagues Investors Airlines Suppliers and Regulator the environment commercial partners

WHY WE ENGAGE Understanding our passengers changing Working with communities at local, regional We will only deliver our vision if Understanding the needs of Airlines and their customers are at the The service provided to passengers is the Heathrow is subject to economic regulation needs and behaviours helps us to achieve and national levels enables us to deliver on the we recruit, skill and retain the best people and investors helps us to access a cost-effective, heart of the Heathrow proposition. It is combination of a highly complex and by the Civil Aviation Authority (CAA), which our vision to give passengers the best airport objectives of Heathrow 2.0, our sustainability develop a flexible, motivated, efficient, diverse stable, diversified financing base for the important that we understand their needs interconnected system of services from is the independent aviation regulator in the service in the world. leadership plan. and engaged team. Engaged employees business and to make Heathrow an attractive and deliver the right operating environment different organisations. Heathrow works UK, responsible for economic regulation, deliver excellent service. global infrastructure investment. for our airlines. collaboratively and in partnership with all airspace policy, safety the organisations in this ecosystem to deliver and consumer protection. our vision.

HOW WE ENGAGE Passenger interactions at the airport and Heathrow Strategic Planning Group represents The Colleague Engagement Forum allows Shareholders controlling 10 per cent or more Heathrow Leadership Group works The Working Together Charter is a We meet regularly with the CAA to discuss satisfaction surveys drive KPIs which measure many of the local authorities and other public colleagues from across the business at all of the issued ordinary shares of FGP Topco collaboratively through a Joint Steering foundation for building better relationships all issues relating to the regulated elements how successful we are and provide feedback organisations responsible for planning the levels can have their say and help make Limited are entitled to appoint one Non- Board to improve the end-to-end passenger between Heathrow and our Suppliers with of Heathrow. on the impact of our decisions. land use, transport, environment, economic Heathrow a great place to work. Executive Shareholder Director to the HAHL experience at Heathrow. The group the purpose to support Heathrow and We respond to various CAA publications We use consumer research groups to engage development and sustainable development of The People Leadership Forum works Board for every 10 per cent held. comprises the Chief Executives of Heathrow, Supplier colleagues to work together and related to the economic regulation of the and shape the key decisions we make. Horizon the sub-region surrounding Heathrow Airport. with partners to create an agile, diverse, We provide quarterly financial updates, British Airways, Virgin Atlantic, NATS and fulfil our vision to give passengers the best airport. This includes regulatory price control is an online community of 3007 current and It works proactively to shape proposals for inclusive and skilled workforce that has semi-annual investor reports and debt the CAA. It meets quarterly under the airport service in the world. reviews and expansion related matters. 601 potential Heathrow users which can be expansion of the airport to ensure these are access to quality careers, employment investor presentations. Chairmanship of Heathrow’s CEO. Team Heathrow Annual Conference has sustainably planned, maximise the benefits As part of our licence we are required to used when making real time decisions. and training opportunities. We provide an annual report and accounts, We engage formally with airlines throughout become the premier gathering for our publish various regulatory documents. and minimise the impacts felt across the area. the year on key areas including: operational top strategic supply-chain partners and We use social media, our website, the Employee InPulse surveys help measure which include optional enhanced disclosures. Regulatory reporting through the Annual Official Heathrow traveller blog, email Local Focus Forum is a quarterly meeting that progress made with our engagement and passenger experience, the expansion procurement professionals. This event we host, made up of resident associations and We perform investor roadshows and of Heathrow and pricing and governance allows us to showcase our success stories, Regulatory Accounts. communication’s and the Heathrow App to plans and make sure we’re moving in the make prospectus documents available. communicate directly with our passengers. local councillors from the villages bordering right direction. around capital spend. This is augmented network with peers and develop strategic Heathrow, where we share information about We have ongoing dialogue with current with further bespoke engagement on a partnerships. The Consumer Challenge Board (CCB). The Our diversity networks help us promote an and potential investors. pending developments and operational range of issues as an airline or as an airport Heathrow Business Summits give participants CCB help shape our passenger engagement impacts that might affect the local area and inclusive culture through events, fundraising We liaise with credit rating agencies to community as is necessary. strategy by providing independent challenge and awareness campaigns. They include: the chance to meet and collaborate with give residents the opportunity to raise queries ensure we understand the impact of our Quarterly joint executive meetings take place Heathrow’s key suppliers, regional SMEs, on the use of our passenger research and of concerns. Proud, our LGBT+ network; HAND, Heathrow strategic decisions on their assessment. engagement in our business planning. Airport’s Network for Disability; en-haNCE with customers. fellow Team Heathrow colleagues and retail Heathrow Community Noise Forum is a group our culture and ethnicity network; and We provide ESG reporting which The CEO regularly visits major current and partners across Heathrow. made up of local councillors and residents Altitude, our gender equality network. integrates Heathrow 2.0 KPIs into our potential international airlines. The Heathrow Sustainability Partnership is a from 12 boroughs around Heathrow affected future financing plans. group of companies representing all sectors by noise from the airport. It seeks members’ Heathrow Skills Taskforce advises us on the Further information can be found at our at the airport, all working hard to improve inputs in the planning and communication of skills and training programmes we need to Heathrow corporate website https://www. Heathrow’s sustainability performance. the modernisation of Heathrow’s airspace. make Heathrow’s expansion a success. heathrow.com/company/investor-centre. The Clean Vehicles Partnership works with Heathrow Community Engagement Board We monitor Colleague safety through KPI reporting and take action to companies at Heathrow to reduce emissions is an independent body that has been from their fleet operations. established to give those who live, work and continuously improve the safety of travel through Heathrow more influence over our working environment. how the airport operates today and how it Heathrow has regular team updates, and may grow in the future. briefings, the HUB intranet portal includes Charity partnership with CARE International a CEO blog and other communications. UK; The Duke of Edinburgh’s Award programme; Heathrow Community Trust. We also use social media, our website, the Official Heathrow traveller blog, email communication’s and the Heathrow App to communicate directly with our communities. Further information can also be found at https://www.heathrowexpansion. com/local-community. Further information on our engagement on the environment can be found in the sustainability section of this report from page 30 to 47 and at https://www.heathrow.com/ company/community-and-environment/

heathrow-2-0/reports-and-further-reading.

T T T T

LINK TO STRATEGIC PRIORITIES T

E E E E R E R R R R

A C A C A C A C A C

I I I I I N N N N N V S V V S V S V S S S R S U S R S R U S R U S R U U F U H F F H F H F H H O E H S T O E O E S T O E S T O E S T S T B S S T T B S B S T B S T B S T B T E R R T A W E R R E R R A W E R R A W E R R A W E A W A AN M E A W IN O A AN M E A AN M E IN O A AN M E IN O A AN M E IN O A AN IN O M T T PL CU OM IN O M AB GR M T T PL CU OM M T T PL CU OM AB GR T T PL CU OM AB GR T T PL CU OM AB GR T T PL AB GR OJO HE ST ABLE GR OJO LE OJO HE ST OJO HE ST LE HE ST LE HE ST LE HE LE

74 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

PRINCIPAL RISK Passengers Communities and Colleagues Investors Airlines Suppliers and Regulator the environment commercial partners

HOW WE ENGAGE Passenger interactions at the airport and Heathrow Strategic Planning Group represents The Colleague Engagement Forum allows Shareholders controlling 10 per cent or more Heathrow Leadership Group works The Working Together Charter is a We meet regularly with the CAA to discuss satisfaction surveys drive KPIs which measure many of the local authorities and other public colleagues from across the business at all of the issued ordinary shares of FGP Topco collaboratively through a Joint Steering foundation for building better relationships all issues relating to the regulated elements how successful we are and provide feedback organisations responsible for planning the levels can have their say and help make Limited are entitled to appoint one Non- Board to improve the end-to-end passenger between Heathrow and our Suppliers with of Heathrow. on the impact of our decisions. land use, transport, environment, economic Heathrow a great place to work. Executive Shareholder Director to the HAHL experience at Heathrow. The group the purpose to support Heathrow and We respond to various CAA publications We use consumer research groups to engage development and sustainable development of The People Leadership Forum works Board for every 10 per cent held. comprises the Chief Executives of Heathrow, Supplier colleagues to work together and related to the economic regulation of the and shape the key decisions we make. Horizon the sub-region surrounding Heathrow Airport. with partners to create an agile, diverse, We provide quarterly financial updates, British Airways, Virgin Atlantic, NATS and fulfil our vision to give passengers the best airport. This includes regulatory price control is an online community of 3007 current and It works proactively to shape proposals for inclusive and skilled workforce that has semi-annual investor reports and debt the CAA. It meets quarterly under the airport service in the world. reviews and expansion related matters. 601 potential Heathrow users which can be expansion of the airport to ensure these are access to quality careers, employment investor presentations. Chairmanship of Heathrow’s CEO. Team Heathrow Annual Conference has sustainably planned, maximise the benefits As part of our licence we are required to used when making real time decisions. and training opportunities. We provide an annual report and accounts, We engage formally with airlines throughout become the premier gathering for our publish various regulatory documents. and minimise the impacts felt across the area. the year on key areas including: operational top strategic supply-chain partners and We use social media, our website, the Employee InPulse surveys help measure which include optional enhanced disclosures. Regulatory reporting through the Annual Official Heathrow traveller blog, email Local Focus Forum is a quarterly meeting that progress made with our engagement and passenger experience, the expansion procurement professionals. This event we host, made up of resident associations and We perform investor roadshows and of Heathrow and pricing and governance allows us to showcase our success stories, Regulatory Accounts. communication’s and the Heathrow App to plans and make sure we’re moving in the make prospectus documents available. communicate directly with our passengers. local councillors from the villages bordering right direction. around capital spend. This is augmented network with peers and develop strategic Heathrow, where we share information about We have ongoing dialogue with current with further bespoke engagement on a partnerships. The Consumer Challenge Board (CCB). The Our diversity networks help us promote an and potential investors. pending developments and operational range of issues as an airline or as an airport Heathrow Business Summits give participants CCB help shape our passenger engagement impacts that might affect the local area and inclusive culture through events, fundraising We liaise with credit rating agencies to community as is necessary. strategy by providing independent challenge and awareness campaigns. They include: the chance to meet and collaborate with give residents the opportunity to raise queries ensure we understand the impact of our Quarterly joint executive meetings take place Heathrow’s key suppliers, regional SMEs, on the use of our passenger research and of concerns. Proud, our LGBT+ network; HAND, Heathrow strategic decisions on their assessment. engagement in our business planning. Airport’s Network for Disability; en-haNCE with customers. fellow Team Heathrow colleagues and retail Heathrow Community Noise Forum is a group our culture and ethnicity network; and We provide ESG reporting which The CEO regularly visits major current and partners across Heathrow. made up of local councillors and residents Altitude, our gender equality network. integrates Heathrow 2.0 KPIs into our potential international airlines. The Heathrow Sustainability Partnership is a from 12 boroughs around Heathrow affected future financing plans. group of companies representing all sectors by noise from the airport. It seeks members’ Heathrow Skills Taskforce advises us on the Further information can be found at our at the airport, all working hard to improve inputs in the planning and communication of skills and training programmes we need to Heathrow corporate website https://www. Heathrow’s sustainability performance. the modernisation of Heathrow’s airspace. make Heathrow’s expansion a success. heathrow.com/company/investor-centre. The Clean Vehicles Partnership works with Heathrow Community Engagement Board We monitor Colleague safety through KPI reporting and take action to companies at Heathrow to reduce emissions is an independent body that has been from their fleet operations. established to give those who live, work and continuously improve the safety of FINANCIAL STATEMENTS travel through Heathrow more influence over our working environment. how the airport operates today and how it Heathrow has regular team updates, and may grow in the future. briefings, the HUB intranet portal includes Charity partnership with CARE International a CEO blog and other communications. UK; The Duke of Edinburgh’s Award programme; Heathrow Community Trust. We also use social media, our website, the Official Heathrow traveller blog, email communication’s and the Heathrow App to communicate directly with our communities. Further information can also be found at https://www.heathrowexpansion. com/local-community. Further information on our engagement on the environment can be found in the sustainability section of this report from page 30 to 47 and at https://www.heathrow.com/ company/community-and-environment/

heathrow-2-0/reports-and-further-reading.

T T T T

LINK TO STRATEGIC PRIORITIES T

E E E E R E R R R R

A C A C A C A C A C

ANNUAL REPORT AND ACCOUNTS 2019 75 SECTION 02 GOVERNANCE

Group structure 78 HAHL Board of Directors 80 Executive Committee 84 Corporate governance 86 Chairman’s introduction 86 Governance structure 88 Roles and responsibilities 90 Composition of the HAHL Board and its committees 91 2019 HAHL Board activities 92 Effectiveness 93 Audit Committee 94 Remuneration Committee 98 Nominations Committee 104 Finance Committee 105 Sustainability and Operational Risk Committee 106 Directors’ report 108 Directors’ responsibilities 111

76 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 77 GROUP STRUCTURE

Heathrow Airport Limited (the ‘Company’) is an indirect As the functions of the HAHL Board and its committees subsidiary of Heathrow Airport Holdings Limited. The are applied equally to all subsidiaries of the HAHL Group, Company’s financial activities are aligned with Heathrow including the Company, the discussion in the Corporate Airport Holdings Limited and the wider Heathrow Airport Governance section relating to the governance structure and Holdings Limited Group (the ‘HAHL Group’) and also with composition of the HAHL Board and its committees has been the Heathrow (SP) Limited Group, which is the intermediate extracted from the financial statements of Heathrow Airport parent undertaking of the smallest group to consolidate these Holdings Limited. financial statements. The ultimate parent company of the HAHL Group is FGP The Board of Directors of Heathrow Airport Holdings Limited Topco Limited. A simplified structure of FGP Topco Limited (the ‘HAHL Board’) determines the long-term strategy of the and its subsidiaries along with their principal activities within HAHL Group, ensuring that it acts ethically, has the necessary the HAHL Group is illustrated in the diagram below. resources to meet its objectives, monitor performance, and meet its responsibilities as a major airport group.

FGP TOPCO LIMITED FGP Topco Limited is the ultimate parent No. 5723961 company of the Heathrow group of companies.

HAHL GROUP HEATHROW AIRPORT Heathrow Airport Holdings Limited is the HOLDINGS LIMITED The functions of principal holding company and managing No. 5757208 company of the HAHL Group. the HAHL Board and its Committee are applied equally LHR AIRPORTS LHR Airports Limited provides corporate and central LIMITED to all subsidiaries of support services for Heathrow. the HAHL Group No. 1970855

HEATHROW Heathrow Finance Plc is a funding company FINANCE PLC for the Heathrow group of companies. No. 6458635

HEATHROW (SP) Heathrow (SP) is the holding company of a LIMITED group of companies that owns and operates Heathrow No. 6458621 airport and provides the Heathrow Express rail service.

HEATHROW FUNDING Heathrow Funding Limited is a funding company LIMITED for the Heathrow group of companies. No. 99529 (Jersey)

HEATHROW AIRPORT Heathrow Airport Limited owns and LIMITED operates Heathrow airport. No. 1991017

HEATHROW EXPRESS OPERATING COMPANY Heathrow Express Operating Company Limited operates LIMITED the rail service between Heathrow airport and No. 3145133 Paddington station, London.

Structure has been simplified for ease of reference, additional companies exist between these companies.

78 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

OUR OWNERS Shareholders’ Agreement The HAHL Group is owned by a consortium of investors (the All the Shareholders are party to a Shareholders’ Agreement ‘Shareholders’) who hold shares in FGP Topco Limited. Details which determines certain governance procedures in the HAHL of the Shareholders’ equity interests, as at 31 December 2019, Group. Under the terms of the Shareholders’ Agreement, are shown in the table below: each Shareholder, controlling ten per cent or more of the issued ordinary shares of FGP Topco Limited, is entitled to Shareholder % held appoint one director to the HAHL Board for every 10 per cent they hold. There are also a limited number of matters reserved Ferrovial 25.00% for approval by the Shareholders. Although these matters are Hubco Netherlands B.V. (an indirect subsidiary of reserved to the Shareholders, the HAHL Board would expect Ferrovial, S.A., Spain) to express a view to the Shareholders before any decisions were taken. Qatar Holding LLC 20.00% GOVERNANCE REPORT Qatar Holding Aviation (a wholly-owned subsidiary of Governance arrangements resulting from the Qatar Holding LLC) Heathrow Group’s secured financing platform In 2008, a secured financing platform was put in place. As Caisse de dépôt et placement du Québec (CDPQ) 12.62% part of these arrangements, the Group entered into a Common Terms Agreement (CTA) with its debt investors. GIC 11.20% The CTA sets out the terms and conditions of the Group’s Baker Street Investment Pte Ltd (11.20%) borrowing and the ongoing management of its secured (an investment vehicle of GIC) financing platform. The CTA also sets out the financial and non-financial covenants that must be complied with Alinda 11.18% in relation to the financing platform. The CTA restricts QS Airports UK, LP (investment vehicle managed by amendments to the Articles of Association of companies Alinda Capital Partners), in the Group without obtaining prior consent from the Security Trustee. China Investment Corporation (CIC) 10.00% Stable Investment Corporation (an investment vehicle The governance measures put in place in 2008 are of the China Investment Corporation) designed to ensure that the Group has the means to conduct its regulated business separately from other Universities Superannuation Scheme (USS) 10.00% companies within the Heathrow Group, and that all dealings USS Buzzard Limited (wholly-owned by the between other companies within the Heathrow Group are Universities Superannuation Scheme on an arm’s-length basis. FINANCIAL STATEMENTS

Qatar Holding Ferrovial (Spain) 20% 25%

CDPQ (Canada) 12.62% USS (UK) 10%

GIC (Singapore) CIC (China) 11.2% 10%

Alinda (US) 11.18%

ANNUAL REPORT AND ACCOUNTS 2019 79 HAHL BOARD OF DIRECTORS

HAHL BOARD OF DIRECTORS CHAIRMAN, EXECUTIVE DIRECTORS, COMPANY SECRETARY

LORD PAUL DEIGHTON CHAIRMAN Appointed June 2016 N Lord Deighton is best-known for delivering the 2012 London Olympic Games to international acclaim as CEO of LOCOG (London Organising Committee of the Olympic Games), enhancing the UK’s reputation for infrastructure service-delivery and generating national pride. He was Commercial Secretary to the Treasury and was responsible for the UK’s National Infrastructure Plan, focusing on getting major projects built, benefits captured, attracting capital into the UK from across the world and creating the right environment for continued infrastructure investment. Lord Deighton also had a very successful career at Goldman Sachs. He is now guiding Heathrow through its next phase of development to fulfil Heathrow’s vision of giving passengers the best airport service in the world.

JOHN HOLLAND-KAYE CHIEF EXECUTIVE OFFICER Appointed July 2014 F S

John joined the company as a Commercial Director in May 2009. From November 2012, John was Development Director and was responsible for delivering the £1billion annual investment in transforming Heathrow, including the new Terminal 2: The Queen’s Terminal, which opened on 4 June 2014. He was previously Divisional CEO with Taylor Wimpy Plc. Prior to that, John was Managing Director, National Sales Division, of Bass Brewers, and has also worked as a strategy consultant with LEK Consulting for a number of high-profile businesses. He is a member of HRH The Prince of Wales Sustainable Markets Council, DEFRA’s Council for Sustainable Business and Chairs Business in the Community’s (BITC) Employment and Skills Leadership Team.

JAVIER ECHAVE CHIEF FINANCIAL OFFICER Appointed November 2016 F

Javier joined Heathrow in January 2008 and was closely involved in establishing the current capital structure and positioning Heathrow as a strong credit in the financial markets. Over a four-year period up to 2016, as Finance Director for Operations and Performance, Javier played a key role in the delivery of a cost-efficiency programme and in ensuring a rigorous appraisal of a multi-billion capital investment plan.

CAROL HUI CHIEF OF STAFF AND GENERAL COUNSEL Appointed Company Secretary April 2009

Carol was appointed Chief of Staff from 1 January 2017. She is responsible for legal affairs, business assurance, external and internal communications, sustainability and environment. She joined Heathrow in March 2009 as General Counsel. Carol has extensive senior executive experience in transport, oil and gas and infrastructure industries and was a corporate finance lawyer at Slaughter and May. She has received numerous awards in her career including from the Financial Times, The Lawyer, Sinopro and PwC.

80 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

HAHL BOARD OF DIRECTORS INDEPENDENT NON-EXECUTIVE DIRECTORS

PROFESSOR DAVID BEGG INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed November 2010 S David has extensive expertise in the transport sector and is a Non-Executive Board Member of FirstGroup; Chairman of the Northern Way Transport Compact.; Chairman of the British Chamber of Commerce Infrastructure Commission, Chief Executive of Portobello Partnership, a member of the High Speed Rail 2 External Challenge Group; Advisor to the Greater Manchester Transport Executive; publisher and contributor at the Transport Times magazine; and Visiting Professor in Sustainable Transport at Plymouth University. He was previously Chairman of the Commission for Integrated Transport, an independent advisory board to the Government, and GOVERNANCE REPORT Chairman of Tube Lines, the company responsible for maintenance and upgrade work on three London Underground lines.

RT. HON RUTH KELLY INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed April 2019 A Ruth’s previous roles include Secretary of State for Transport and Financial Secretary to the Treasury and thus brings a wealth of political, transport and financial experience to Heathrow. This will help Heathrow build on its role as the UK’s only hub airport – providing new trading global links post-Brexit and delivering world-class passenger service.

RACHEL LOMAX INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed November 2010 N R Rachel has 40 years’ experience in policy-making, at the heart of the British economy. Rachel

served as Deputy Governor of the Bank of England from 2003 until 2008. Before joining the FINANCIAL STATEMENTS Bank, she was Permanent Secretary of three government departments, including the Department of Work and Pensions and the Welsh Office as well as the Department for Transport. Her earlier career was spent at the Treasury, the Cabinet Office and the World Bank. Rachel was also a Non-Executive Director of HSBC. She is currently Acting Chair of the British Council and is a Non- Executive Director of Serco. Rachel stepped down from the HAHL Board on 23 February 2020, after having served for nine and a half years on the Board.

COMMITTEE KEY Sustainability and Operations Nominations committee Finance committee S R Remuneration committee Committee chair A Audit committee N F Risk committee

ANNUAL REPORT AND ACCOUNTS 2019 81 HAHL BOARD OF DIRECTORS NON-EXECUTIVE SHAREHOLDER DIRECTORS

HIS EXCELLENCY AKBAR AL BAKER NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed January 2013 A N F S Akbar has been the Chief Executive Officer of Qatar Airways since 1997. He also led the development of the multi-billion dollar Hamad International Airport, which opened in April 2014. Mr Al Baker is a graduate of Commerce and Economics, and holds a private pilot’s licence. He is also CEO of several divisions of Qatar’s national airline – being Qatar Airways Holidays, Qatar Aviation Services, Qatar Duty Free Company, Doha International Airport, Qatar Distribution Company, Qatar Executive, Oryx Rotana Hotel and Qatar Aircraft Catering Company. Alternate: Ali Bouzarif (appointed January 2018).

AHMED AL-HAMMADI NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed February 2018 F R Ahmed is Head of the Active Investments department for the Qatar Investment Authority. He oversees QIA’s direct sector teams as well as fund investments in the Equity, Fixed Income, Hedge Funds, Private Equity and Real Estate asset classes. Prior to joining QIA, Ahmed worked at EFG-Hermes, a regional asset manager and, before that, at consulting firm Booz & Co. advising financial-services clients on strategy, private-equity investment opportunities, and organisation structures. Ahmed is a graduate of the Wharton School at the University of Pennsylvania and has obtained his MBA from the Harvard Business School. Alternate: Deven Karnik (appointed September 2014).

STUART BALDWIN NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed April 2006 N F R Stuart is Managing Director and Head, Infrastructure Group of GIC. Stuart has served as a director on a number of portfolio company boards for GIC as well as a number of advisory boards for private equity and infrastructure funds. He is currently a director at Terminal Investment Limited Sarl and Raffles Infra Holdings. Alternate: Alexander Leonard (appointed April 2018 and resigned December 2019). Kamil Burganov (appointed January 2020).

CHRIS BEALE NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed October 2011 F Chris is the Managing Partner of Alinda Capital Partners, an independent investment firm with over $7.4 billion in equity commitments to infrastructure investments. Alinda’s investors are predominantly pension funds for public-sector and private-sector employees. Prior to founding Alinda in 2005, he led the world’s largest infrastructure finance business as global head of project finance at Citigroup. He was also global head of project finance at Morgan Stanley and Credit Suisse First Boston. Alternate: Sam Coxe (appointed November 2012).

MARIA CASERO NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed January 2019

Maria is People, Communications and Asset Management director for Ferrovial Airports and Ferrovial Power Infrastructure. She joined the Group in 2008. Maria has more than 30 years’ experience in the aviation industry in Europe, Latin America and the United States. Before joining Ferrovial, she was the Human Resources and International Communications Director at Carlson Wagonlit Spain. Between 1992 and 2006, she held various leadership positions in British Airways. She began her professional career as an Accounting Manager at American Airlines. Alternate: Gonzalo Velasco Zabalza (appointed February 2017); Ignacio Aitor Garcia Bilbao and Ignacio Madridejos Fernández (appointed January 2020).

82 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

OLIVIER FORTIN NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed October 2015 A F S Olivier is a director in the CDPQ team based in London and is an experienced asset manager and infrastructure investor in the UK and Continental Europe. Previously he was working with AMP Capital, and prior to that with MAp Airports and Macquarie Capital Funds. He has been involved with Brussels, Copenhagen, Bristol, Rome and Newcastle airports. He also sits on the supervisory board of Budapest Airport.

JORGE GIL NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed December 2012 A N F S R Jorge is the Chief Executive Officer Ferrovial Aeropuertos. Jorge joined the Ferrovial group in 2001, as the Structured Finance Director (until 2007) and then the Corporate and Business Development Director (2007- 2010) of Cintra. He was a member of the Executive Committee of Cintra and a board member of various companies (407-ETR, Chicago Skyway, Indiana Toll Road and SH-130). In November 2010 he joined the financial department of Ferrovial as Capital Markets and Finance Director of Ferrovial, with responsibility for the financing and treasury of the Group and for the Investor Relations Department. Jorge began his career in the banking industry at The Chase Manhattan Bank in Spain, working in Corporate Finance and M&A. GOVERNANCE REPORT Alternate: Inigo Meiras (appointed December 2012 and resigned September 2019). Ignacio Aitor Garcia Bilbao, Gonzalo Velasco Zabalza and Ignacio Madridejos Fernández (appointed January 2020).

ERNESTO LÓPEZ MOZO NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed October 2009 A F R

Ernesto is Ferrovial’s Chief Financial Officer. Ernesto joined Ferrovial from Telefonica, having previously held positions at JP Morgan and Santander. Alternate: Ignacio Aitor Garcia Bilbao (appointed March 2013); Ignacio Madridejos Fernández and Gonzalo Velasco Zabalza (appointed January 2020).

MIKE POWELL NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed November 2014 F N Mike is Head of Private Markets Group of USS Investment Management (USSIM), which is the wholly

owned investment management subsidiary of the Universities Superannuation Scheme (USS). USSL is FINANCIAL STATEMENTS the corporate trustee of one of the largest private sector pension funds in the UK with assets under management of £68 billion as at 31 March 2019 and over 400,000 members across more than 350 universities and other higher education and associated institutions in the UK. USSL, through its investment manager, USSIM, is a long-term owner of assets with a strong track record of investing in infrastructure and infrastructure-like businesses. Mike has overall responsibility for the Private Markets Group and is Chairman of the Private Markets Investment Committee. He is also a member of the USSIM Executive Committee and Investment Policy Committee. Mike has served as a director on a number of portfolio company boards for USS as well as a number of advisory boards for private equity and infrastructure funds. Mike is also a member of the British Venture Capital Association Limited Partner Advisory Committee. Alternate: Tom Kelly (appointed October 2018).

DAVID XIE NON-EXECUTIVE SHAREHOLDER DIRECTOR Appointed September 2018 F David is a director of CIC Capital Corporation (CIC Capital), a wholly-owned subsidiary of China Investment Corporation (CIC). He is responsible for CIC Capital’s infrastructure investments globally, in particular in transport, utilities and energy sectors. In addition to Heathrow, David also sits on the board of Cadent Gas and InterPark. Prior to joining CIC in 2011, David worked 11 years in various capacities at Merrill Lynch. David is a graduate of Pennsylvania State University and has an MBA degree from Georgetown University. Alternate: Jinhong Chen (appointed September 2018).

ANNUAL REPORT AND ACCOUNTS 2019 83 EXECUTIVE COMMITTEE

JOHN HOLLAND-KAYE JAVIER ECHAVE CAROL HUI CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER CHIEF OF STAFF AND GENERAL COUNSEL For biographical details see page 80.

ROSS BAKER CHIEF COMMERCIAL OFFICER

Ross was appointed Chief Commercial Officer in January 2017. Previously he was Heathrow’s Director of Operations and, before that, Director of Strategy. Prior to joining Heathrow in 2011, Ross held a mix of advisory and aviation industry roles. At Bain & Company he advised on a mix of strategic, commercial and operational engagements. Prior to Bain, Ross spent a decade with British Airways where he held a range of operational and commercial-management roles in the UK and overseas.

STUART BIRRELL CHIEF INFORMATION OFFICER

Stuart joined the Company as Chief Information Officer in June 2015. He previously held this role at Formula 1’s McLaren Group where he built an integrated IT team of in-house experts and specialist suppliers to support the rapid growth of the business including new revenue streams. Stuart knows the airport industry well, having spent three successful years as CIO at Gatwick in the run up to, and after, the sale of the airport by Heathrow in 2009. At McLaren Group, he had experience of working in a high-performance environment, where you need extremely high levels of reliability and resilience. Stuart also brings expertise in the use of big data sets, cloud-based solutions and IT security in support of business growth and increased productivity. Stuart resigned on 17 March 2020.

CHRIS GARTON CHIEF OPERATING OFFICER

Chris was appointed as Chief Operating Officer in April 2018. Prior to this, Chris held the equivalent role at Dubai Airport, where he played a key role in growing the annual number of passengers over a nine-year period. His most recent role was Director of Asset Management with Associated British Ports and during his career, Chris has also held a number of positions in engineering and change management at Gatwick Airport, Ineos and ICI. He has a first-class degree in engineering from London’s Imperial College.

84 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT GOVERNANCE REPORT

EMMA GILTHORPE EXECUTIVE DIRECTOR EXPANSION

Emma was appointed as Executive Director Expansion in January 2017. Her responsibilities include Heathrow’s expansion programme as well as master planning. Emma joined Heathrow in September 2009 as Regulatory Director and later became Strategy Director. She was previously BT plc’s Group Director of Industry Policy and Regulation and has held a number of other senior regulatory and public-policy roles in Cable and Wireless.

ANDREW MACMILLAN CHIEF STRATEGY OFFICER

Andrew was appointed Chief Strategy Officer in January 2017. He is responsible for company strategy, forecasting, regulation and corporate process improvement. He joined Heathrow in October 2009 and has worked in strategy, operational and regulatory roles, including leading submissions to the Airports Commission. He is a non-executive trustee of the BAA Pension Fund. Prior to Heathrow, he was with McKinsey and Company based in London and Tokyo, working on infrastructure, logistics FINANCIAL STATEMENTS and organisational transformation and mergers in Europe, the Middle East and Asia.

PAULA STANNETT CHIEF PEOPLE OFFICER

Paula was appointed to HR Director in January 2013. She has worked at Heathrow for 13 years, most recently as HR Director for our Airports Division and Support Services, and previously as programme lead for Heathrow’s Winter Resilience. Paula has a strong record of engaging staff to successfully put in place organisational change and improvement.

ANNUAL REPORT AND ACCOUNTS 2019 85 CORPORATE GOVERNANCE CHAIRMAN’S INTRODUCTION

As a Board, we remain committed to high standards of corporate governance and believe that these high standards are LORD PAUL DEIGHTON CHAIRMAN central to the effective management of the HAHL Group and to maintaining the confidence of our investors.

The following pages provide information on the composition of the HAHL Board and its governance structure and processes, together with reports from each of its committees. For the year ended 31 December 2019, under the Companies (Miscellaneous Reporting) Regulations 2018, the HAHL Group has applied the Wates Corporate Governance Principles for Large Private Companies, published by the Financial Reporting Council (FRC) in December 2018. The Wates Principles provide a framework for the HAHL Board to monitor corporate governance of the HAHL Group and see where governance standards can be raised to a higher level across the business. We believe this, in turn, will result in better engagement with our stakeholder base and ultimately build trust with our passengers, colleagues and investors. The governance framework will also provide the right environment for the HAHL Board to make decisions for the long-term success of Heathrow. The table below summarises the six Wates Principles and indicates where more information can be found in the strategic and the governance reports. Throughout 2020, the HAHL Board will continue to review and challenge how the HAHL Group can continue to improve its corporate governance.

86 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Principle Summary Page

Purpose and The HAHL Board determines the long-term strategy, direction and performance of the 22, leadership HAHL Group. Our vision is to give passengers the best airport service in the world and 72, the HAHL Board is responsible for ensuring that values, strategy and culture are aligned 86 with that purpose. The HAHL Group’s strategic framework, shown in the Strategic Report page 23, embeds our vision, purpose, priorities and values with our strategic propositions as key elements to ensure our stakeholders’ interests are central to our future developments at Heathrow.

Board The HAHL Board comprises the Chairman, CEO, CFO, three Independent Non- Executive 90, composition Directors and ten Shareholder Non-Executive Directors. The Independent Non-Executive 91, GOVERNANCE REPORT Directors bring outside experience in aviation, transport and finance, and provide 93 constructive challenge and influence. The composition of the HAHL Board is partly determined by the Shareholders’ Agreement and it is considered to be in the best interests of the HAHL Group for the senior executives and each Shareholder to be represented at meetings. The HAHL Board is committed to improving its diversity in terms of gender, ethnicity, disability and age, and its Nominations Committee is responsible for reviewing diversity and succession planning.

Directors’ The HAHL Group has a separate Chairman and CEO to ensure that the balance of 88- responsibilities responsibilities, accountabilities and decision making are effectively maintained. The HAHL 90 Board receives regular reports on business, financial performance, passenger numbers, colleague issues and engagement, stakeholders and local communities and management of key business risks along with updates on activities and decisions of its committees. Non- Executive Directors provide constructive challenge to the Board’s decision-making processes.

Opportunity The HAHL Board seeks out opportunity while mitigating risk. Long-term strategic 60, and risk opportunities are highlighted in the annual Business Plan process presented to the HAHL 94, Board. The Risk and Assurance Committee and the Executive Committee ensure that 106 inherent and emerging risks are identified and managed appropriately and in a timely manner updating the risk register for any changes in underlying conditions. Operational and

safety risks are regularly reviewed by the Sustainability and Operational Risk Committee and FINANCIAL STATEMENTS financial risks by the Audit Committee.

Remuneration The Remuneration Committee has clearly defined terms of reference and is responsible 98 for making recommendations to the HAHL Board concerning the HAHL Group’s remuneration strategy, recruitment framework and long-term incentive plans for senior executives. The Committee takes advice from independent external consultants who provide updates on legislative requirements, best market practice and remuneration benchmarking. Pay is aligned with performance, taking into account fair pay and conditions across the company’s workforce.

Stakeholder Central to our strategic framework, shown on page 23, is our high-level aspirations for the 22, relationships future of Heathrow for all our stakeholder groups. Our strategic priorities and values are how 74 and we deliver our vision. They reflect a simple business logic: engaged people deliver excellent engagement service, which in turn delivers financial returns and growth in a sustainable way. The table within the section 172 (1) statement on pages 74 and 75 sets out the details of some of the engagement that takes place at an operational or HAHL Group level with key stakeholders.

ANNUAL REPORT AND ACCOUNTS 2019 87 CORPORATE GOVERNANCE GOVERNANCE STRUCTURE

The HAHL Board determines the long-term strategy, direction and performance of the HAHL Group, including approval of the annual budget and management business plan. It is responsible for ensuring that the HAHL Group acts ethically and meets its legal and regulatory responsibilities, monitoring the HAHL Group’s performance and ensuring the HAHL Group has the necessary resources to meet its objectives.

Whilst the HAHL Board retains oversight and accountability for The duties of the HAHL Board are executed partially through its decision-making within the HAHL Group, responsibility for day- five principal committees: Audit, Nominations, Remuneration, to-day management and decision-making is delegated to the Sustainability and Operational Risk and Finance. These CEO and the Executive Committee. The HAHL Board delegates committees operate within defined terms of reference, which specific responsibilities to its formal committees, which consist are reviewed regularly by the HAHL Board. The role of of individuals with the most appropriate knowledge, expertise, Company Secretary to the HAHL Board is performed by industry experience and independence. the Chief of Staff and General Counsel.

HAHL BOARD

SUSTAINABILITY AND NOMINATIONS REMUNERATION AUDIT COMMITTEE OPERATIONAL RISK FINANCE COMMITTEE COMMITTEE COMMITTEE COMMITTEE

CHIEF EXECUTIVE OFFICER AND EXECUTIVE COMMITTEE

Airport Intelligence Heathrow Expansion Charities and Policy Risk and Internal People Safety Liaison Investment Programme Communities Coordination Assurance Investigations Committee Committee Group Committee Committee Committee Group Committee Steering Group

The HAHL Board receives regular reports on business and The Executive Committee develops and recommends to the financial performance, employee issues and management of HAHL Board, medium and long-term business development key business risks. The Chairmen of the Audit Committee and strategies. They ensure the delivery of agreed strategies by the Sustainability and Operational Risk Committee provide providing guidance, approvals, governance and monitoring. regular updates on matters discussed at those committees. The Executive Committee also considers health and safety, legal Decisions from the Remuneration Committee are shared with and regulatory matters, risk assurance and compliance, and the HAHL Board. The Finance Committee submits an annual reviews and approves all matters to be presented to the HAHL update of its activity to the HAHL Board and minutes of the Board for its consideration or approval. There is a high level of committee are shared on a regular basis. Where appropriate, interaction between the HAHL Board and the Executive recommendations are made by each of the HAHL Board Committee. Members of the Executive Committee provide committees so that final decisions can be taken by the HAHL presentations at board meetings on a regular basis and attend Board. Members of the HAHL Board have the opportunity strategy days with the HAHL Board in order to review issues in to attend monthly Shareholder Working Group sessions to more detail, plan and align views. receive more in-depth information about specific aspects of The Executive Committee delegates specific matters to the business. a number of sub-committees whilst retaining overall The Executive Committee is the forum of the senior executive accountability. The sub-committees consist of managers and management team of the HAHL Group. The HAHL Board other experts with appropriate knowledge, industry experience delegates authority for day-to-day management of the HAHL and expertise to make decisions and report back to the Group to the Executive Committee, which meets weekly and is Executive Committee. Each sub-committee operates in chaired by the Chief Executive Officer. In addition to the Chief accordance with terms of reference approved by the Executive Officer, membership of the Executive Committee Executive Committee and is evaluated on a regular basis. includes the Executive Directors responsible for each business function. Further information is shown on page 84.

88 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Executive sub-committees

AIRPORT SAFETY COMMITTEE CHARITIES AND COMMUNITIES COMMITTEE Responsible for reviewing Heathrow’s responsibilities, Responsible for agreeing strategy and policy for strategies, policies, conduct, performance and risk- charitable giving and oversight of investment in local management approach. It covers all aspects of safety, communities at Heathrow. It is chaired by the Chief of including fire, physical health and safety, airside safety, Staff and General Counsel. Other members consist of psychological safety, environmental safety (compliance) the Chief Financial Officer, Chief People Officer and and the potential impact on Heathrow’s reputation Expansion Director. arising from its performance in these respects. It is chaired by the Chief Financial Officer. Other members include the Chief Operating Officer, Chief Information POLICY COORDINATION GROUP

Officer, Health and Safety Director and others. GOVERNANCE REPORT A strategic, senior policy-forum that provides advice and recommendations on Heathrow’s policy priorities and positions to the Executive Committee PEOPLE COMMITTEE and HAHL Board, where necessary, and oversees the Responsible for reviewing strategy in relation to people implementation of engagement plans. Chaired by issues, including reviewing benefit schemes, living wage, the Chief of Staff and General Counsel. Other gender pay-gap reporting and other people-related members include the Director of Communications, matters. It is chaired by the Chief People Officer. Other Sustainability & Environment Director, Head of Policy members include Chief Financial Officer, Chief of Staff and Strategic Communications. and General Counsel, Reward Director, Finance Director and Head of People and others. RISK AND ASSURANCE COMMITTEE Responsible for reviewing the effectiveness of the INTELLIGENCE LIAISON GROUP risk-management strategy and framework, and for Responsible for providing a secure forum to safely share reviewing the principal risks. It is chaired by the secret, sensitive and often time-critical intelligence. It is Chief of Staff and General Counsel. Other members chaired by the Director of Security. Other members consist of the Chief Financial Officer and the Chief consist of the Chief Executive Officer, Chief Operations Strategy Officer. Officer, Chief of Staff and General Counsel and Expansion Director. INTERNAL INVESTIGATIONS STEERING GROUP

Responsible for setting and overseeing compliance with FINANCIAL STATEMENTS HEATHROW INVESTMENT COMMITTEE the governance framework for relevant internal Acts under authority delegated by the Executive investigations. It provides the Executive, HAHL Board Committee as a single accountable forum on capital and Audit Committees with assurance that Heathrow investment across Heathrow. It is chaired by the Chief has appropriate procedures to ensure appropriate Financial Officer. Other members consist of the Chief governance and conduct of internal investigations. Information Officer, Chief Operations Officer, Chief It is chaired by the Chief of Staff and General Counsel. Communications Officer, Chief Strategy Officer and Other members consist of the People Director, Head of Expansion Director. Security Intelligence, Director of Internal Audit, Risk and Assurance, Deputy General Counsel, Head of Legal Commercial and a designated independent Non- EXPANSION PROGRAMME COMMITTEE Executive Director. Responsible for oversight, steering and delivery of the Heathrow Expansion Programme. It is chaired by the Expansion Director. Membership includes the Expansion Programme Director and others.

ANNUAL REPORT AND ACCOUNTS 2019 89 CORPORATE GOVERNANCE ROLES AND RESPONSIBILITIES

It is the HAHL Group’s policy that the roles of the Chairman and Chief Executive Officer are separate, with their roles and responsibilities clearly divided. The key roles and responsibilities of the Directors of the HAHL Board are set out below:

CHAIRMAN CHIEF EXECUTIVE OFFICER The Chairman is responsible for: The Chief Executive Officer is responsible for the leadership and day-to-day management of the HAHL • Leading and managing the HAHL Board, its Group, with a scope covering operations, finance, effectiveness and governance. regulation, asset management, customer services, • Ensuring HAHL Board members are aware of and information services, human resources, corporate understand the views of key stakeholders. communications and legal. • Helping set the tone from the top in terms of the purpose, goal, vision and values for the whole organisation. • Creating the conditions for overall Board effectiveness.

CHIEF FINANCIAL OFFICER The Chief Financial Officer is responsible for the financial performance of the HAHL Group and supporting the Chief Executive Officer in developing and implementing strategy.

INDEPENDENT NON-EXECUTIVE DIRECTORS Independent Non-Executive Directors are responsible for providing constructive challenge and bringing independence to the HAHL Board and its decision-making process. Particularly: • Bringing a wide range of skills and experience, including independent judgement on issues of strategy, performance and risk management. • Scrutinising and challenging the performance of the HAHL Group’s business. • Assessing risk and the integrity of the financial information and controls.

NON-EXECUTIVE SHAREHOLDER DIRECTORS The Non-Executive Shareholder Directors are appointed in accordance with the Shareholders’ Agreement and are responsible for providing constructive challenge to the HAHL Board’s decision-making processes.

COMPANY SECRETARY The role of company secretary is performed by the Chief of Staff and General Counsel. The Company Secretary is available to all Directors and is responsible for information flows to the HAHL Board and advising the HAHL Board on corporate governance matters. Directors may also take professional advice at the Company’s expense.

90 ANNUAL REPORT AND ACCOUNTS 2019 CORPORATE GOVERNANCE STRATEGIC REPORT COMPOSITION OF THE HAHL BOARD AND ITS COMMITTEES

At the date of this report, the HAHL Board comprises the Chairman, three Independent Non-Executive Directors, ten Shareholder Non-Executive Directors and two Executive Directors – the Chief Executive Officer and the Chief Financial Officer.

The names and biographies of all directors of the HAHL Board The Chairman and each of the Independent Non-Executive are published on pages 80 to 83. Nine of the Non-Executive Directors have letters of appointment with the HAHL Group Shareholder Directors have formally approved alternates, who rather than service contracts, which include the expected time are also listed. The alternates are statutory directors of HAHL, commitment of the appointment. who attend board and other meetings only when Shareholder The Directors are required to comply with Heathrow’s Non-Executive Directors are unable to do so. The Executive and group policies, including policies on Professional Conduct, Non-Executive Directors are equal members of the HAHL Board Health and Safety, Conflicts of Interest and Anti-Bribery, Gifts and have collective responsibility for the HAHL Group’s strategy GOVERNANCE REPORT and Hospitality. and performance. Each HAHL Board Director has a clear understanding of their accountability and responsibilities. The HAHL Board believe that its size and composition are appropriate to meet the strategic needs and challenges of Recommendations for the appointment of directors to the the business and to enable effective decision-making. The HAHL Board are made by the Nomination Committee. composition of the HAHL Board is partly determined by the Appointments are made on merit and against objective Shareholders’ Agreement, which provides that each criteria with due regard to diversity (including skills, experience Shareholder controlling ten per cent or more of the issued and gender). Non-executive appointees are also required ordinary shares of FGP Topco Limited, is entitled to appoint to demonstrate that they have sufficient time to devote to one director to the HAHL Board. It is considered to be in the the role. interests of the HAHL Group for each Shareholder to be The Independent Non-Executive Directors bring outside represented on the HAHL Board. In addition, there are four experience in aviation, transport and finance. They provide independent Non-Executive Directors whose purpose is to constructive challenge and influence from outside the HAHL challenge and provide external expertise. The HAHL Board Group. The Chairman holds periodic meetings with all the does not have a majority of independent Non-Executive Non-Executive Directors to discuss the performance of Directors and it is felt that the numbers associated with management and the HAHL Board, without the Executive ensuring a majority of independent Non-Executive Directors Directors present. would make the HAHL Board unwieldy and unduly costly. The HAHL Board considered the Chairman, Lord Paul Deighton, It is acknowledged that, although there is international diversity to be independent in judgment and character on his on the HAHL Board, there is a relative lack of gender diversity. appointment on 22 June 2016. The Rt. Hon. Ruth Kelly was The Board is committed to making the HAHL Group an appointed as an additional Independent Non-Executive Director ever-more inclusive environment, thereby fostering a more on 8 April 2019. diverse workforce which should increase diversity at the most FINANCIAL STATEMENTS senior levels.

ANNUAL REPORT AND ACCOUNTS 2019 91 CORPORATE GOVERNANCE 2019 HAHL BOARD ACTIVITIES

The HAHL Board held 11 scheduled meetings during the year ended 31 December 2019 and two strategy days in conjunction with the Executive Committee. During the year the HAHL Board focused on a number of areas as set out below.

2019 HAHL Board activities

STRATEGY AND OPERATIONAL FINANCIAL PERFORMANCE • Considered operational and business performance. • Reviewed financial performance and forecasts. • Received updates on material communications with • Considered and approved the 2019/20 budget. regulators and considered the impact of changes in • Reviewed and approved results announcements. regulation and developing regulation affecting • Approved the payment of quarterly Heathrow expansion. interim dividends. • Airport expansion. • Industrial relations. • Passenger growth strategy. GOVERNANCE • Retail strategy. • Reviewed and approved the 2018 annual report • Initial Business Plan. and accounts. • Considered the impact of new corporate governance requirements, including additional reporting requirements and the Wates Code. LEADERSHIP AND STAKEHOLDERS • Approved the appointment of Maria Casero as • Considered output from the HAHL Board a non-executive director and the appointment evaluation process. of the Rt Hon Ruth Kelly as an independent • Considered and agreed key risks and their mitigation non-executive director. and control. • Approved the extension of appointments of • Agreed Modern Slavery Act Statement. Professor David Begg and Rachel Lomax as • Approved 2018/19 Continuity of Service Plan. independent non-executive directors. • Discussed the revised approach to workforce engagement. • Considered updates on diversity and succession planning.

92 ANNUAL REPORT AND ACCOUNTS 2019 CORPORATE GOVERNANCE STRATEGIC REPORT EFFECTIVENESS GOVERNANCE REPORT A comprehensive induction programme is provided for all new HAHL Board Directors. Our Directors update their skills, knowledge and familiarity with the HAHL Group by regularly meeting with senior management, attending operational site visits, strategy sessions with the Executive Committee and regular training sessions.

All HAHL Board Directors have access to the advice and Other key information is prepared by the relevant internal services of the Company Secretary and the Heathrow function. Processes for collecting data, as well as the Group’s Legal team. They may also take independent reporting of that data, are reviewed on a cyclical basis by professional advice at the company’s expense. the HAHL Group’s internal audit function with quarterly reporting provided to the Audit Committee. The Chairman and Company Secretary are responsible for ensuring that Directors receive accurate, timely and clear The HAHL Board considers the regular review of its function, information. To ensure that adequate time is available for Committees and Directors to be an essential element of Board discussion and to enable informed decision-making, good corporate governance and important for identifying briefing papers are prepared and circulated to Directors a key areas of focus for future improvement and for week prior to scheduled HAHL Board meetings. strengthening its overall performance. An externally facilitated assessment of the HAHL Board and its The HAHL Board also receives regular and timely information Committees was conducted in October 2015 and informal (at least monthly) on all key aspects of the business, self-assessments took place in September 2018 and including health and safety, risks and opportunities, the November 2019. Areas covered included boardroom financial performance of the business, strategy, operational FINANCIAL STATEMENTS behaviours and dynamics, the number, structure and matters, market conditions and sustainability, all supported process around board meetings, board composition by key performance indicators. and structure and the interaction between the HAHL Board Key financial information is collated from the Heathrow and its formal committees. Group’s various accounting systems. The HAHL Group’s The results of each evaluation were presented to the HAHL finance function is appropriately qualified to ensure the Board for consideration and recommendations, with integrity of this information, and is provided with the follow-up actions debated and adopted as appropriate. necessary training to keep up to date with regulatory Overall, the reviews showed a consensus that the HAHL changes. Financial information is externally audited by Board is functioning well and is effective. No material Deloitte LLP on an annual basis, and financial controls shortcomings in relation to the operation of the HAHL Board are reviewed by the Group’s internal audit function. and its committees were highlighted by the reviews. The Chairman confirms that each director continues to make a valuable contribution to the HAHL Board and, where relevant, its committees.

ANNUAL REPORT AND ACCOUNTS 2019 93 AUDIT COMMITTEE

OLIVIER FORTIN CHAIR

OTHER COMMITTEE MEMBERS • Jorge Gil • His Excellency Akbar Al Baker • Ernesto López Mozo • Rt. Hon Ruth Kelly

INTRODUCTION • Reviewing Internal Audit reports to the Audit Committee on the effectiveness of the HAHL Group’s systems for The Audit Committee reviews and reports to the HAHL Board internal control, financial reporting and risk management. on matters relating to financial reporting. It also reviews the role and independence of the external auditor. • Reviewing the external auditor’s management letter and management’s responses. • Considering management’s response to any major external ROLE AND RESPONSIBILITIES or internal audit recommendations. The Audit Committee is a sub-committee of the HAHL Board • Approving the appointment and dismissal of the Director of and its responsibilities include: Internal Audit, Risk and Assurance. • Considering the appointment of the external auditor, taking • Reviewing Heathrow’s procedures for handling allegations into account relevant ethical guidance and assessing the from whistleblowers. independence of the external auditor, ensuring that key • Reviewing the ethics policy and monitoring its application audit personnel are rotated at appropriate intervals throughout the business, considering any ethical issues (including overseeing the process for selecting the external which arise as a result of audit findings. auditor and making recommendations to the HAHL Board). • Overseeing all press releases relating to external • Recommending the audit fee to the HAHL Board for financial results. approval and pre-approving any fees in respect of non-audit • Reviewing Heathrow’s tax policy and insurance strategy services provided by the external auditor, and ensuring that and arrangements. the provision of non-audit services does not impair the external auditor’s independence or objectivity. • Reviewing the results of the Data Protection Officer’s data privacy compliance monitoring programme and ensuring • Agreeing with the external auditor the nature and the that the Data Protection Office is adequately resourced to scope of the audit, and reviewing the auditor’s quality carry out its tasks. control procedures and steps taken by the auditor to respond to changes in regulatory and other requirements. • Considering the adequacy of management’s response to any major data-privacy non-compliance findings as a result • Reviewing reports on the effectiveness of systems of monitoring activities. for internal financial control, financial reporting and risk management. • Ensuring that the accounts are fair, balanced and understandable. • Monitoring the integrity of the financial statements of the HAHL Group, and reviewing and challenging, where • Considering any other topics, as defined by the necessary, the actions and judgements of management in HAHL Board. relation to the interim and annual financial statements, and any press release related to those statements.

94 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

2019 ACTIVITY The Audit Committee held four meetings during the year and its main activities were:

FINANCIAL REPORTING INTERNAL AUDIT • Reviewed and recommended approval of the interim and • Approved the scope of the 2020 internal audit plan. preliminary results, draft annual report and the associated • Reviewed delivery of the 2019 internal audit plan and going-concern statements. approved any material changes to it. • Reviewed the annual statement of responsibility • Reviewed the conclusions, key findings and actions by management with respect to the internal (remediation plans) from internal audits completed. controls environment. • Monitored progress of the implementation of actions • Reviewed financial resilience and assumptions used to from internal audit activity.

support the going-concern statement. GOVERNANCE REPORT • Considered whether the internal audit function is • Reviewed Group accounting policies with emphasis on adequately resourced. the impact of the IFRS 16 leasing standard which is applicable for the current year. RISK MANAGEMENT AND INTERNAL CONTROL • Reviewed accounting developments and their impacts • Reviewed the effectiveness of risk management and and significant accounting issues. internal governance for the HAHL Group, particularly in relation to financial risks. Further detail on our approach EXTERNAL AUDIT to managing risk is included on page 60. • Considered reports by the external auditor on its audit • Reviewed the effectiveness of Heathrow’s internal and its review of the financial statements. control systems and application of internal financial • Reviewed the external audit strategy and assessed reporting controls. effectiveness of the external audit. • Monitored progress and reviewed the approach to the • Reviewed and approved the proposed approach for upgrade of our general ledger and ERP system. transitioning our auditors in 2020. • Reviewed effectiveness of, and provided guidance to, • Reviewed audit and non-audit fees incurred in 2019. Heathrow’s Fixed Asset Steering Group.

GOVERNANCE AND OTHER • Considered and approved our tax strategy and reviewed tax matters. • Reviewed the Committee’s terms of reference.

• Received corporate-governance updates. FINANCIAL STATEMENTS • Reviewed Heathrow’s procedures for handling allegations from whistleblowers and receiving reports from the Internal Investigations Steering Group.

ANNUAL REPORT AND ACCOUNTS 2019 95 AUDIT COMMITTEE (CONTINUED)

KEY JUDGEMENTS AND FINANCIAL REPORTING MATTERS The Audit Committee reviewed critical accounting judgements and key sources of estimation uncertainty outlined in the ‘Accounting policies’ section of the financial statements. The Committee considered that the most significant financial statements’ risk matters are as follows:

Key judgement and financial reporting matters Audit committee review and conclusions

Classification of costs between operating expenditure The Committee reviewed and approved the Group property, plant and equipment and capital expenditure accounting policy. The HAHL Group has a substantial capital programme The Committee received regular updates of work undertaken by the Fixed Asset Steering which has been agreed with the regulator (the Civil Group (FASG), who are responsible for ensuring capitalised costs are appropriate, and Aviation Authority). challenged the FASG to ensure that processes and controls are further improved to deal Only those costs which satisfy the requirements of IAS16 with the increased capital spend associated with Heathrow expansion. As a result, ‘Property, Plant and Equipment’ should be capitalised, which additional financial controls were identified which will further improve our internal in some cases requires management judgement. control environment. These will be embedded into our processes during 2020. The Committee reviewed Managements judgement that it remains probable that expansion of the airport will continue and therefore it is appropriate to have recognised £450m of spend to date as an asset in the course of construction. The Committee noted that there was a strong case for expansion and the benefits it will bring the UK. It noted this was evidenced by the UK parliament vote overwhelmingly supporting the Airports National Policy Statement in 2018. It also noted the recent CAA policy document on early design and construction costs, provided further progress towards agreeing the regulatory certainty necessary to deliver an expanded Heathrow. The Committee noted the detailed assessments undertaken by Heathrow Management on the affordability of the current Master Plan and the support that the project has from the Executive and Board of Heathrow. It also however noted there was still uncertainty both in the short and medium term. Notable uncertainty included agreement of a regulatory framework which includes the incentives needed for investment, the outcome of a judicial review and the overall response to the DCO application once it is submitted. The Audit Committee agreed with Management and concluded it was probable expansion would occur. It therefore concluded it was appropriate to continue to recognise an asset in the course of construction.

Hedge accounting The Committee sought quarterly updates on management assessments, including The HAHL Group designates certain derivative financial justification of the key assumptions which support the Cash Flow Hedge Reserve. instruments as cash flow hedges. Significant changes in the expected quantum of future Sterling refinancing may lead to insufficient Sterling borrowings to support components of the cash flow hedge reserve, requiring the recycling of the cash flow hedge reserves through income statement.

Fair value of derivative financial instruments The Committee requested quarterly updates on the estimated fair value of open The HAHL Group holds a substantial derivative financial derivatives and justification of the valuation estimate. instruments portfolio comprising interest rate swaps, cross The current-year fair value position was noted as being particularly volatile due to currency swaps, and index-linked swaps which are accounted macroeconomic and political conditions in the UK. The Committee asked the Chief for at fair value. Financial Officer to monitor the fair value movements on a weekly basis and to include In determining the fair value, judgement is used to determine sufficient headroom when considering future distributable reserves. As a result, the the recovery rate and associated reduction in credit risk of Committee was able to be satisfied that the volatility was being appropriately managed super senior ranking derivatives (interest rate and index- and did not risk the financial stability of the HAHL Group. linked swaps). The Committee continues to support management in its discussion with the International Financial Reporting Interpretations Committee to clarify whether it is reasonable to designate index-linked swaps as an inflation hedge under IFRS 9. Further detail regarding the sensitivity of the year-end valuation to key assumptions can be found in note 13.

96 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Key judgement and financial reporting matters Audit committee review and conclusions

Fair value of investment properties The Committee challenged and approved the key assumptions with reference to expert The HAHL Group holds a variety of investment properties third-party valuation advice. The review included consideration of the sensitivity of the that are accounted for at fair value. In determining the fair valuation to changes in the key assumptions. value, judgement is required with regard to a number of The Committee challenged the valuation of investment properties which may be valuation assumptions that include property rental growth removed as part of Heathrow expansion and received confirmation that under IAS40 any rate, operating cost and expected yields. investment property removed would be transferred to property, plant and equipment at GOVERNANCE REPORT its fair value with no impact to reserves. The Committee continues to note the sensitivity of the valuation to key assumptions. Further detail of this can be found in note 6.

Valuation of the retirement-benefit obligation In the current year a Triennial pension review was performed. The Committee The HAHL Group operates a defined-benefit pension scheme challenged key economic and mortality assumptions used in the IAS19 accounting with both open and closed sections. and discussed this with external auditors. After receiving expert third-party advice the committee concluded that the assumptions were based on reasonable methodology Assessing the defined-benefit pension obligation requires and within an acceptable range. significant estimate and judgement, in particular with regard to discount rate, inflation and mortality. The Committee continues to note the sensitivity of the valuation to key assumptions. Further detail of this can be found in note 15. FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 97 REMUNERATION COMMITTEE

JORGE GIL CHAIR

OTHER COMMITTEE MEMBERS • Ernesto López • Stuart Baldwin • Ahmed Al-Hammadi • Rachel Lomax

INTRODUCTION ROLES AND RESPONSIBILITIES The Remuneration Committee is responsible for making The Remuneration Committee is a sub-committee of the recommendations to the HAHL Board concerning the Group’s HAHL Board and its responsibilities include approvals of: remuneration strategy, framework and policy, and approving • The remuneration policy of the members of the Executive the compensation packages for senior executives. In doing so, Committee and Senior Managers. the Committee takes advice from independent external consultants who provide updates on legislative requirements, • The compensation packages of the members of the best market practice and remuneration benchmarking, Executive Committee including salary, bonus, pensions drawing on evidence from across the sectors in which the and other incentive compensation. company operates and from other sectors. The Remuneration • The contractual terms for the members of the Executive Committee has clearly defined terms of reference. Committee and independent Non-Executive Directors. The HAHL Group is an active equal opportunities employer. • The design and terms of bonus plans. It promotes an environment free from discrimination, • The design and terms of long-term incentive plans. harassment and victimisation, where everyone receives equal • The approval of the annual salary review of all employees treatment and career development regardless of age, gender, on non-negotiated and negotiated grade (including nationality, ethnic origin, religion, marital status, sexual budget level). orientation or disability. All decisions relating to employment practices (including remuneration) are objective, free from bias and based solely upon work criteria and individual merit. Each year the Group publishes its Gender Pay Report which can be found at www.heathrow.com. Further details on our gender pay-gap can be found on page 32.

98 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

2019 ACTIVITIES REMUNERATION AND COMPONENTS The Remuneration Committee held four scheduled meetings The Remuneration Committee reviews the HAHL Group’s during the year, and its main activities were: remuneration structure each year to ensure that the framework supports Heathrow’s strategic ambitions • Reviewed Heathrow reward offering and compared to the and rewards directors fairly for the contribution that they external market. make to the business. • Agreed the direction of development of the new reward Remuneration is set with reference to the market and at a strategy in 2020. level that will enhance Heathrow’s resources by attracting and • Approved the launch of a new annual Share in Success retaining quality leaders who can deliver Heathrow’s strategic Saver plan for the wider colleague population. ambitions in a manner consistent with its values, purpose and • Approved the payment of the 2018 annual bonus, the 2015 the interests of its shareholders. Share in Success (SIS) Grant and Saver Plans and the 2016 The remuneration policy reflects the complexity and Performance Cash Plan (PCP). significance of one of the world’s largest airports. Executive GOVERNANCE REPORT • Approved the performance metrics and targets for 2019 director’s remuneration comprises a base salary, benefits, annual bonus, 2019 SIS Grant and the 2019 wider colleague retirement provisions, annual bonus and long-term incentive SIS Saver plan. plan (LTIP). • Approved the 2019 Heathrow Gender Pay Gap; reviewed progress made to date and the associated action plan. • Approved the budget for 2020 annual salary review for senior management grades. • Discussed Environmental, Social and Governance (ESG) metrics for the annual bonus plan and SIS Saver and Grant plans, with a desire to include these in the future. FINANCIAL STATEMENTS

ANNUAL REPORT AND ACCOUNTS 2019 99 REMUNERATION COMMITTEE (CONTINUED)

EXECUTIVE AND WIDER WORKFORCE REMUNERATION POLICY TABLE The Remuneration Committee takes into account fair pay and conditions across Heathrow’s workforce when setting the executive directors’ remuneration policy. Pay components vary by an individual’s organisational band (level in the organisation), however, remuneration themes are broadly consistent across the wider workforce. The key components of the executive committee’s remuneration relative to the wider workforce are summarised below:

Component and Executive committee1 Other management colleagues Negotiated grade colleagues purpose in supporting business strategy

Base salary Base salaries are typically reviewed annually, Base salaries are reviewed annually, and set Frontline colleague salaries are subject to To secure and retain and set taking into account: taking into account: collective bargaining with Heathrow’s quality individuals to deliver • The roles scope, responsibilities and • The role’s scope, responsibilities and recognised trade unions. Heathrow’s strategy. accountabilities. accountabilities. • Remuneration benchmarking and competitive • Remuneration benchmarking and market practice. competitive market practice. • Individual performance. • Individual performance. • Fair pay and conditions across • Fair pay and conditions across Heathrow’s workforce. Heathrow’s workforce.

Benefits Benefits include cash travel allowance and Eligibility for benefits is determined by an Benefits include life assurance and To comprise part of a private health care, life assurance and permanent individual’s organisational band, and includes permanent health insurance. market competitive health insurance. some or all of: cash travel allowance, private remuneration package. health care, life assurance and permanent health insurance.

Retirement provisions Pension provision is available for all new colleagues Pension provision is available for all new Pension provision is available for all new To comprise part of a market through a Defined Contribution Pension Plan, colleagues through a Defined Contribution colleagues through a Defined competitive remuneration established on 16 June 2008. Pension Plan, established on 16 June 2008. Contribution Pension Plan, established package, rewarding Colleague contribution rates are either 3%, 5% Colleague contribution rates are either on 16 June 2008. sustained contribution and, 8% of base salary, matched with an employer 3%, 5% and, 8% of base salary, matched Colleague contribution rates are either and encouraging retention. contribution of 8%, 10%, 12% respectively. with an employer contribution of 8%, 10%, 3%, 5% and, 8% of base salary, Alternatively, the Executive committee may also be 12% respectively. matched with an employer contribution offered a fixed percentage of their annual base The former Group defined benefit pension of 8%, 10%, 12% respectively. salary. The Chief Executive Officer receives a arrangement, the BAA Pension Scheme, was The former Group defined benefit supplement of 30% of annual base salary having closed to new members on 15 June 2008. pension arrangement, the BAA Pension been granted protection by HMRC for the Lifetime The Scheme remains open to future accrual Scheme, was closed to new members on Allowance for pensions. for those contributing members who joined 15 June 2008. The Scheme remains prior to the closure date. open to future accrual for those All colleagues impacted by the Lifetime contributing members who joined prior Allowance or Annual Allowance may opt for to the closure date. an alternative cash allowance. This comprises All colleagues impacted by the Lifetime of £10,000 payable as an Employer Pension Allowance or Annual Allowance may opt Contribution, if applicable, with the balance for an alternative cash allowance. payable as a salary supplement. This comprises of £10,000 payable as an Employer Pension Contribution, if applicable, with the balance payable as a salary supplement.

Annual bonus Executive directors participate in the Heathrow Management colleagues participate in the Frontline colleagues participate in the Motivates the achievement Bonus Plan. The plan is measured against targets Heathrow Bonus Plan. The plan is measured Airport Profit Bonus with payment of Heathrow’s strategic for EBITDA (75% weighting) and Gross Operating against targets for EBITDA (75% weighting) determined by EBITDA performance. ambitions, linking this Expenses (25% weighting). and Gross Operating Expenses (25% with annual measurable Subject to satisfying individual and financial weighting). performance criteria performance criteria, the maximum incentive Eligibility for annual bonus and target bonus and rewarding individual opportunity is 100% of base salary for the Chief opportunity is determined by an individual’s contributions to Executive Officer. This is paid in March of the organisational band. Subject to satisfying Heathrow success. following year. individual and financial performance criteria, the maximum bonus opportunity is 200% of target. This is paid in March of the following year.

1 Also applies to the directors of Heathrow Airport Ltd

100 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

Component Executive committee1 Other management colleagues Negotiated grade colleagues and purpose in supporting business strategy

Long-term incentive Executive directors participate in the Heathrow Members of senior management participate In 2015 the SIS Saver was introduced plan Share in Success (SIS) Grant (Long-Term Incentive in the Heathrow SIS Grant (Long-Term to give colleagues an opportunity to GOVERNANCE REPORT Aligns the interests of Plan) designed to reward the most senior leaders Incentive Plan) designed to reward the most benefit from exceeding business targets executive directors with for the success of Heathrow over a three-year senior leaders for the success of Heathrow over the Q6 Regulatory Period and to those of our ultimate period. Executive directors are allocated an over a three-year period. Senior Managers ensure that the long-term incentive plans shareholders, rewarding award with a maximum face value of 200% of are allocated an award with a maximum face for all colleagues in Heathrow were long-term sustainable base salary for the Chief Executive Officer at the value determined by individual organisational aligned. Given the success of the 2015 results, creating start of the plan. Each executive director will band. Each participant will receive a cash SIS Saver, in supporting delivery of the shareholder value and receive a cash payment provided that Heathrow payment provided that Heathrow meets Q6 plan and targets, which was reflected encouraging retention. meets agreed performance conditions measured agreed performance conditions measured in the payout, the Remuneration over a three-year period. over a three-year period. Committee approved the introduction The SIS Grant is measured against targets for The SIS Grant is measured against targets for of a new three-year SIS Saver plan with EBITDA (40% weighting), Airport Service Quality EBITDA (40% weighting), Airport Service the intention of launching a new (ASQ) score (30% weighting) and the return on Quality (ASQ) score (30% weighting) and the plan annually. Regulatory Assets Base (RAB) for our return on Regulated Assets Base (RAB) for our The wider colleague population are shareholders (30% weighting). For each shareholders (30% weighting). For each eligible to participate in the SIS Saver performance metric, entry-level performance performance metric, entry level performance plan, where colleagues have the results in zero vesting, target-level performance results in zero vesting, target level opportunity to save in return for a bonus, results in 50% vesting and maximum level performance results in 50% vesting and subject to company performance. performance results in 100% vesting. maximum level performance results in To ensure all our colleagues are There are currently three SIS Grants 100% vesting. incentivised to deliver the same in operation: There are currently three SIS Grants long-term goals, the targets for the performance metrics in the SIS Saver • 2017 SIS Grant: performance in operation: plan are aligned with the targets of measured over 2017 to 2019; payment • 2017 SIS Grant: performance the SIS Grant. in August 2020. measured over 2017 to 2019; payment There is currently one SIS Saver plan • 2018 SIS Grant: performance in August 2020. in operation: measured over 2018 to 2020; payment • 2018 SIS Grant: performance in August 2021. measured over 2018 to 2020; payment • 2019 SIS: performance measured over 2019 to 2021; payment in July 2022. • 2019 SIS Grant: performance in August 2021. FINANCIAL STATEMENTS measured over 2019 to 2021; payment • 2019 SIS Grant: performance in August 2022. measured over 2019 to 2021; payment in August 2022. The Remuneration Committee can adjust the performance metrics and targets in The Remuneration Committee can adjust appropriate circumstances, and may impose the performance metrics and targets in different eligibility and performance conditions appropriate circumstances and may impose on future awards. different eligibility and performance conditions on future awards. Management colleagues not eligible to participate in the SIS Grant, are eligible to participate in the SIS Saver plan, where colleagues have the opportunity to save in return for a bonus, subject to company performance. To ensure all our colleagues are incentivised to deliver the same long-term goals, the targets for the performance metrics in the SIS Saver plan are aligned with the targets of the SIS Grant. There is currently one SIS Saver plan in operation: • 2019 SIS: performance measured over 2019 to 2021; payment in July 2022.

ANNUAL REPORT AND ACCOUNTS 2019 101 REMUNERATION COMMITTEE (CONTINUED)

POTENTIAL REWARD OPPORTUNITIES AT DIFFERENT LEVELS OF PERFORMANCE The graph below shows the Chief Executive Officer’s total remuneration levels under the different performance scenarios: Minimum, Target and Maximum. The remuneration policy aligns a high proportion of total executive remuneration with the performance of the Group.

00000

000000 1,473,805

200000

2000000 736,903

100000 753,970 452,382 Remuneration (£) 1000000 999,738 999,738 999,738 00000

0 M T M

F A SIS G

Minimum: Fixed pay comprising of current base salary, pension and benefits.

Target: Minimum plus target annual bonus and the SIS Grants in operation vest at the target level (annualised).

Maximum: Minimum plus maximum annual bonus and the SIS Grants in operation vest in full (annualised).

102 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

CHIEF EXECUTIVE OFFICER REMUNERATION The table below presents the remuneration figures for the Chief Executive Officer for the years ended 31 December 2018 and 31 December 2019:

Fixed Pay (£) Performance Pay (£)

Annual SIS Grant 2019 Salary/fees Benefits Pension Sub-total Sub-total 2019 total bonus1 vesting2

Chief Executive Officer

John Holland-Kaye 750,905 19,577 225,272 995,754 565,965 1,043,044 1,609,009 2,604,763 GOVERNANCE REPORT

1 Accrued annual bonus to be paid in March 2020. 2 Expected 2017 SIS Grant to be paid in August 2020 (based on performance measured over the three 3 years 2017 to 2019).

Fixed Pay (£) Performance Pay (£)

Annual PCP and SIS 2018 Salary/fees Benefits Pension Sub-total Sub-total 2018 total bonus3 Grant vesting4

Chief Executive Officer John Holland-Kaye 733,177 19,532 219,953 972,662 540,496 2,813,325 3,353,821 4,326,483

3 Actual annual bonus paid in March 2019. 4 Actual 2016 PCP, paid in August 2019 (based on performance measured over the three years 2016 to 2018), and SIS Grant paid in March 2019. The SIS was introduced in 2015 to reward colleagues based on the success of the Q6 Regulatory Period over the four-year period 2015 to 2018. The total amount paid in 2018 is therefore attributable to four years of performance.

Policy for Non-Executive Directors The Chairman and Independent Non-Executive Directors receive fees for their services and are not eligible to participate in benefit, pension or bonus and other incentive plans. The Remuneration Committee approves the contractual terms, FINANCIAL STATEMENTS remuneration and compensation packages of the Chairman and Independent Non-Executive Directors. The Chairman and each of the Independent Non-Executive Directors have letters of appointment with the HAHL Group.

ANNUAL REPORT AND ACCOUNTS 2019 103 NOMINATIONS COMMITTEE

LORD DEIGHTON CHAIR

OTHER COMMITTEE MEMBERS • Jorge Gil • His Excellency Akbar Al Baker • Stuart Baldwin • Mike Powell • Rachel Lomax

INTRODUCTION The Nominations Committee met three times during the year. In April it recommended the extension of the Chairman’s appointment for a further period of 3 years from 1 May 2019 to 30 April 2022. The Committee also undertook a search for a new Independent Non-Executive Director and recommended the appointment of the Rt. Hon. Ruth Kelly to the HAHL Board in April 2019.

ROLES AND RESPONSIBILITIES The Nominations Committee is a sub-committee of the HAHL Board and its responsibilities include: • Identifying and recommending for the consideration of the HAHL Board all new appointments of Independent Non-Executive directors. • Identifying and recommending for the consideration of the HAHL Board the appointment of the Chairman. • Ensuring a formal, rigorous and transparent procedure is followed for the appointment of new independent Non-Executive directors to the HAHL Board.

104 ANNUAL REPORT AND ACCOUNTS 2019 FINANCE COMMITTEE STRATEGIC REPORT

ERNESTO LÓPEZ CHAIR

OTHER COMMITTEE MEMBERS • John Holland-Kaye • Javier Echave • A Non-Executive Shareholder Director representing each shareholder entitled to appoint a director to the HAHL Board GOVERNANCE REPORT

INTRODUCTION • The creation of, or the granting of any permission to create, any mortgage, charge, encumbrance or other security The Finance Committee acts as both a HAHL Board interest on any uncalled capital or on any asset, in each case Committee for the approval of matters relating to the in excess of certain financial thresholds. financing of the HAHL Group and a forum for obtaining consents required from the Shareholders of FGP Topco • Any material change, amendment or variation to any of the Limited pursuant to the Shareholders’ Agreement. financing arrangements of any member of the HAHL Group or any request for any waiver thereunder or any entry into any new loan or loan facility, in each case in excess of ROLES AND RESPONSIBILITIES certain financial thresholds. The Finance Committee is a sub-committee of the HAHL • The entry into any new non-investment grade debt facility. Board and its responsibilities include: • Changes to Heathrow’s treasury policies before going to • Any prospectus or other listing document required in the HAHL Board. relation to the issuance of any capital-markets instruments • The bi-annual publication of investor reports in respect of

or any formal information memorandum in relation to Heathrow (SP) Limited and Heathrow Finance plc, pursuant FINANCIAL STATEMENTS borrowing by any member of the HAHL Group. to the requirements of the Common Terms Agreement and • The borrowing of any money or the assumption of any the Heathrow Finance plc financing arrangements. indebtedness by any member of the HAHL Group (including • The strategy for mitigating risks relating to the Group’s by way of the issue of securities) in excess of certain financing arrangements. financial thresholds. • The refinancing of any existing indebtedness in respect 2019 ACTIVITIES of any member of the HAHL Group in excess of certain financial thresholds. The Finance Committee held ten scheduled meetings during the year, and its main activities were to approve: • The making of any repayments of principal in addition to scheduled principal payments on any debt that may be • Debt funding for Heathrow, including bond issuances, credit owing by any member of the HAHL Group. facilities and private placements. • Other than as required by the financing arrangements of any • Heathrow’s Funding and Investment Engagement Plan. member of the HAHL Group, the making of any material • The Heathrow (SP) Limited and Heathrow Finance plc 2019 loan or advance or giving of any guarantee, indemnity or Investor Report. provision of any credit, in each case in excess of certain • The base prospectuses for each of Heathrow Finance plc financial thresholds. and Heathrow Funding Limited.

ANNUAL REPORT AND ACCOUNTS 2019 105 SUSTAINABILITY AND OPERATIONAL RISK COMMITTEE

PROFESSOR DAVID BEGG CHAIR

OTHER COMMITTEE MEMBERS • John Holland-Kaye • Jorge Gil • Olivier Fortin • His Excellency Akbar Al Baker

INTRODUCTION The Sustainability and Operational Risk Committee reviews Heathrow’s policies, conduct, performance and risk- management approach against the sustainability goals and operational objectives.

ROLES AND RESPONSIBILITIES The Sustainability and Operational Risk Committee is a sub-committee of the HAHL Board and its responsibilities include: • Reviewing Heathrow’s policies, conduct, performance and risk-management approach against sustainability goals and operational activities. • Reviewing and challenging the performance and conduct of the HAHL Group relating to operational risks and delivery of sustainability goals. • Monitoring and challenging management over the effectiveness of the relevant internal control systems and having access to any audit or assurance report it considers relevant. • Reviewing and assessing management’s response to significant operational incidents and having access to any accident and investigation report it considers relevant. • Monitoring and challenging the appropriateness of sustainability and operational risk assurance strategies and plans, the execution and results of such plans, and relevant communications.

106 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

2019 ACTIVITIES The Sustainability and Operational Risk Committee held four scheduled meetings during the year, and its main activities were: Safety • Reviewed and advised on safety performance and the actions being taken to ensure compliance and improve fire, health and safety standards and to strengthen Heathrow’s safety culture. • Reviewed incidents, using the learnings to develop and promote best-in-class safety performance. • Reviewed and advised on the progress of the health GOVERNANCE REPORT and wellbeing transformation agenda in three strategic areas; ‘Your Mind Matters’, ‘Your Health Matters’, ‘Your Body Matters’. Security • Reviewed and advised on the cyber-security strategy, cyber incidents and mitigation initiatives. • Reviewed and advised on aerodrome security threats, security-improvement deliverables and considered the learnings from external and in-house assessments. Sustainability • Reviewed and advised on delivery of Heathrow 2.0 targets, in particular, carbon, noise, air quality and waste, supported by a programme of internal and external engagement. • Considered the programme of activity to embed Heathrow 2.0 strategy within the business. Risk and assurance • Reviewed the principal risks to ensure alignment with the corporate-governance framework and strategy. FINANCIAL STATEMENTS • Provided challenge to the business with regards to audit and assurance reports. • Reviewed and advised on Brexit contingency planning.

ANNUAL REPORT AND ACCOUNTS 2019 107 HEATHROW AIPORT LIMITED DIRECTORS’ REPORT

The directors present their annual report and audited financial statements for the year ended 31 December 2019.

PRINCIPAL ACTIVITY DIRECTORS Heathrow provides service to a range of market segments, The directors who served during the year and since the year including business and leisure travellers, direct and transfer end, except where noted, were as follows: passengers on long and short-haul routes, operated by a Ross Baker diversified range of major airlines. Heathrow generates revenue from a variety of sources, including services to Stuart Birrell - Resigned 17 March 2020 airlines, concession fees from retail operators, income from Javier Echave car parks, advertising revenue, the rental of airport premises Chris Garton and the provision of facilities and services. Emma Gilthorpe A review of the progress of the Group’s business during the John Holland-Kaye year, the key performance indicators, internal controls, Carol Hui principal business risks and likely future developments are contained in the Strategic and Governance Reports. Andrew Macmillan Paula Stannett RESULTS AND DIVIDENDS COMPANY SECRETARY The profit after taxation for the financial year amounted to £631 million (2018: £446 million profit). Pursuant to section 270 of the Companies Act 2006, a private company registered in England and Wales is not required to Dividends of £421 million (2018: £483 million) were paid have a company secretary. to Heathrow (AH) Limited during the year. The dividend payments were used to fund dividends to the Group’s ultimate shareholders. The statutory results for the year are set out on page 116.

108 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT

EMPLOYMENT POLICIES STATEMENT OF CORPORATE GOVERNANCE The Group has no direct employees. The staff are employed ARRANGEMENTS by LHR Airports Limited, a fellow subsidiary entity of the Details of corporate governance arrangements can be found HAHL Group. The Group directly incurs the employment on page 87. cost of services provided to the Group as stated in the Accounting policies on page 129. EMPLOYEE ENGAGEMENT STATEMENT The Group’s employment policies are regularly reviewed and Details of how the Directors have engaged with employees updated to ensure they remain effective. The Group’s overall can be found in the section 172 (1) statement on page 74. GOVERNANCE REPORT aim is to create and sustain a high performing organisation by building on the commitment of its people. STAKEHOLDER ENGAGEMENT STATEMENT The Group has defined a set ofguiding principles to ensure Details of how the Directors have engaged with suppliers, fair recruitment and selection. The Group continues to aim customers and other stakeholders can be found in the section to recruit, retain and develop high-calibre people and has 172 (1) statement on pages 74 and 75. talent and succession management programmes for managerial roles. SUBSEQUENT EVENTS The Group is committed to giving full and fair consideration to Subsequent events are disclosed in note 23. applicants for employment. Every applicant or employee will be treated equally whatever their race, nationality, ethnic or DIRECTORS’ INDEMNITY national origin, sex, marital status, sexual orientation, religious belief, disability, age or community background. The Group The Company’s Articles of Association provide that, subject actively encourages a diverse range of applicants and commits to the provisions of the Companies Act 2006, but without to fair treatment of all applicants. prejudice to any protection from liability which might otherwise apply, every Director of the Company shall be indemnified out of the assets of the Company against any loss or liability incurred by them in defending any proceedings in which judgement is given in their favour, or in which they are acquitted or in connection with any application in which relief is granted to them by the court for any negligence, default, breach of duty or breach of trust by them in relation to the

Company or otherwise in connection with their duties or FINANCIAL STATEMENTS powers or office. This indemnity also applies to the directors who are Directors of other companies within the Group.

ANNUAL REPORT AND ACCOUNTS 2019 109 HEATHROW AIRPORT LIMITED DIRECTOR’S REPORT (CONTINUED)

AUDITOR Matters disclosed in strategic report Page After a comprehensive tender process, and recommendation Environmental matters made by the Audit Committee, the Board has appointed PricewaterhouseCoopers (PwC) as auditor of the Group for • Sustainable growth 30 the financial year ending 31 December 2020. • Business resilience 62-63 Pursuant to the provisions of section 485 of the Companies • Corporate social responsibility 62-63 Act 2006, a resolution relating to the appointment of the auditor PricewaterhouseCoopers (PwC) will be proposed Colleagues within the period set out in section 485. • Colleague policies 32, 108 26, STATEMENT OF DISCLOSURE OF INFORMATION • Health and safety 62-63 TO THE AUDITOR Each of the persons who is a Director at the date of approval Anti-corruption and bribery policy 91 of this Annual Report confirms that:

Social matters – charitable donations 46 • So far as the director is aware, there is no relevant audit information of which the Company’s auditor is unaware. Security of the airport and passengers 62-63 • The Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of Leadership and governance 87 any relevant audit information and to establish that the Company’s auditor is aware of that information. Description of Principal Risks This confirmation is given and should be interpreted in • Business 62-63 accordance with the provisions of section 418 of the • Financial management 96-97 Companies Act 2006.

Description of the Heathrow business model 14-17 The report was approved and authorised by the Board and was issued on behalf of the Board. Non-financial performance indicators 152

Research and development and innovation 36

JAVIER ECHAVE DIRECTOR 7 May 2020 Company registration number: 01991017

110 ANNUAL REPORT AND ACCOUNTS 2019 DIRECTORS’ STRATEGIC REPORT RESPONSIBILITIES STATEMENT

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with the United Kingdom generally accepted accounting practice (UK Accounting Standards and applicable law), including FRS 102 – “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. GOVERNANCE REPORT In preparing the parent company financial statements, the directors are required to:

• Select suitable accounting policies and then apply them consistently. • Make judgements and accounting estimates that are reasonable and prudent. • State whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements. • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions, and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud FINANCIAL STATEMENTS and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The report was approved and authorised by the Board and was issued on behalf of the Board.

JAVIER ECHAVE DIRECTOR

7 May 2020

ANNUAL REPORT AND ACCOUNTS 2019 111 SECTION 03 FINANCIAL STATEMENTS

Independent auditor’s report 114 Income statement 116 Statement of comprehensive income 117 Statement of financial position 118 Statement of changes in equity 119 Accounting policies 120 Significant accounting judgements and estimates 131 Notes to the Company financial statements 133 Alternative performance measures (APMs) – unaudited 154

112 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 113

Independent auditor’s report to the members of Heathrow Airport Limited for the year ended 31 December 2019

Report on the audit of the financial statements

Opinion In our opinion the financial statements of Heathrow Airport Limited (the ‘Company’):

• give a true and fair view of the state of the company’s affairs as at 31 December 2019 and of its profit for the year then ended; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”; and • have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements which comprise: • the income statement; • the statement of comprehensive income; • the statement of financial position; • the statement of changes in equity; • accounting policies; • significant accounting judgements and estimates; and • the related notes 1 to 23.

The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report.

We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where:

• the directors’ use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

We have nothing to report in respect of these matters.

Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in respect of these matters.

ANNUAL REPORT AND ACCOUNTS 114 Independent auditor’s report to the members of Heathrow Airport Limited for the year ended 31 December 2019 continued

Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.

Matters on which we are required to report by exception Under the Companies Act 2006 we are required to report in respect of the following matters if, in our opinion: • adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or

We have nothing to report in respect of these matters.

Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Simon Cleveland (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 7 May 2020

ANNUAL REPORT AND ACCOUNTS 115 Heathrow Airport Limited

Income statement for year ended 31 December 2019

Year ended 31 December 2019 Year ended 31 December 2018 Before Before certain re- Certain re- certain re- Certain re- measurements measurements1 Total measurements measurements1 Total Note £m £m £m £m £m £m Continuing operations

Revenue 1 2,976 - 2,976 2,874 - 2,874 Operating costs 2 (1,884) - (1,884) (1,824) - (1,824) Other operating items Fair value gain on investment properties 6 - 43 43 - 117 117 Operating profit 1,092 43 1,135 1,050 117 1,167

Financing Finance income 206 - 206 193 - 193 Finance costs (617) 95 (522) (660) (98) (758) 3 (411) 95 (316) (467) (98) (565)

Profit before tax 681 138 819 583 19 602

Tax charge (164) (24) (188) (148) (8) (156) Taxation 4 (164) (24) (188) (148) (8) (156)

Profit for the year2 517 114 631 435 11 446 1 Certain re-measurements consist of: fair value gains on investment property revaluations, gains and losses arising on the re-measurement of financial instruments, the effect of changes in tax rate and the associated tax impact of these. 2 Attributable to owners of the parent.

ANNUAL REPORT AND ACCOUNTS 116

Heathrow Airport Limited

Statement of comprehensive income for the year ended 31 December 2019

Year ended Year ended 31 December 31 December 2019 2018 Note £m £m Profit for the year 631 446

Items that will not be subsequently reclassified to the income

statement: Actuarial (loss)/gain on pensions Gain/(loss) on plan assets1 15 498 (192) (Increase)/decrease in scheme liabilities1 15 (509) 310 Other comprehensive (expense)/income for the year net of tax (11) 118 Total comprehensive income for the year 620 564 Attributable to owners of the parent 620 564 1 Items in the statement above are disclosed net of tax. The tax relating to each component of other comprehensive (expense)/income is disclosed in Note 15.

The statement of comprehensive income has been prepared on the basis that all operations are continuing operations.

ANNUAL REPORT AND ACCOUNTS 117

Heathrow Airport Limited

Statement of financial position as at 31 December 2019

31 December 31 December 2019 2018 Note £m £m

Assets Non-current assets Property, plant and equipment 5 11,561 11,404 Investment properties 6 2,522 2,472 Intangible assets 7 174 173 Retirement benefit surplus 15 33 28 Investment in subsidiary 8 42 42 Derivative financial instruments 13 24 9 Trade and other receivables 10 2,492 2,537 16,848 16,665

Current assets Inventories 9 13 13 Trade and other receivables 10 430 408 Term deposits 11 725 120 Cash and cash equivalents 11 812 588 1,980 1,129 Total assets 18,828 17,794

Liabilities Non-current liabilities Borrowings 12 (13,189) (12,394) Derivative financial instruments 13 (1,086) (1,334) Deferred income tax liabilities 14 (480) (436) Retirement benefit obligations 15 (29) (32) Provisions 16 (1) (1) Trade and other payables 17 (29) (30) (14,814) (14,227)

Current liabilities Borrowings 12 (629) (437) Derivative financial instruments 13 (54) (20) Provisions 16 (8) (13) Current income tax liabilities (27) (38) Trade and other payables 17 (591) (553) (1,309) (1,061) Total liabilities (16,123) (15,288) Net assets 2,705 2,506

Equity Capital and reserves Share capital 18 35 37 Revaluation reserve 266 691 Retained earnings 2,404 1,778 Total shareholder’s equity 2,705 2,506

These financial statements of Heathrow Airport Limited (Company registration number: 01991017) were approved by the Board of Directors and authorised for issue on 7 May 2020. They were signed on its behalf by:

Javier Echave John Holland-Kaye Director Director

ANNUAL REPORT AND ACCOUNTS 118 Heathrow Airport Limited

Statement of changes in equity for the year ended 31 December 2019

Profit and Share Share Revaluation loss capital premium reserves reserve Total Notes £m £m £m £m £m 1 January 2018 10 350 598 1,467 2,425

Profit for the year - - - 446 446 Other comprehensive income Actuarial loss on retirement benefit schemes: Loss on plan assets - - - (192) (192) Decrease in scheme liabilities - - - 310 310 Total comprehensive income - - - 564 564

Other movements Transfer between reserves - investment property fair value movements1 - - 117 (117) - Deferred tax on investment properties1 - - (17) 17 - Deferred tax on property, plant and equipment revaluations - - (7) 7 - Total transfer to revaluation reserve - - 93 (93) -

Transactions with owners New shares issued 18 1,271 - - (1,271) - Reduction of nominal share capital from 0.34p to 0.01p 18 (1,244) - - 1,244 - Transfer to retained earnings - (350) - 350 - Dividends paid 19 - - - (483) (483) Total transactions with owners 27 (350) - (160) (483)

31 December 2018 37 - 691 1,778 2,506

Profit for the year - - - 631 631 Other comprehensive income/(expense) Actuarial loss on retirement benefit schemes: Gain on plan assets - - - 498 498 Increase in scheme liabilities - - - (509) (509) Total comprehensive income - - - 620 620

Transfer between reserves - investment property fair value movements1 - - 43 (43) - Deferred tax on investment properties1 - - (6) 6 - Total transfer to revaluation reserve - - 37 (37) -

Transactions with owners New shares issued 18 663 - (462) (201) - Reduction of nominal share capital from £1 to £0.05 per share 18 (665) - - 665 - Dividends paid 19 - - - (421) (421) Total transactions with owners (2) - (462) 43 (421)

31 December 2019 35 - 266 2,404 2,705 1 Movements in the valuation of investment properties recorded to the income statement are transferred to the revaluation reserve with the associated deferred tax liability and the prior year deferred tax liability on revaluations of property, plant and equipment. Details of the amount of deferred tax are in Note 14.

ANNUAL REPORT AND ACCOUNTS 119

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019

The principal accounting policies applied in the preparation of these financial statements of Heathrow Airport Limited (the ‘Company’) are set out below. These policies have been consistently applied to all the years presented, unless stated otherwise.

Statement of compliance These financial statements have been prepared and approved by the directors in compliance with Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (‘FRS 102’).

The Company The Company is a private company limited by shares, incorporated in the United Kingdom and registered in England and Wales. The registered office is The Compass Centre, Nelson Road, Hounslow, Middlesex, TW6 2GW. The Company’s immediate parent undertaking is Heathrow (AH) Limited. The parent company of Heathrow (AH) Limited is Heathrow SP Limited for which consolidated financial statements are prepared. The ultimate controlling undertaking for which consolidated financial statements is prepared is the FG Topco Limited.

Basis of accounting The Company financial statements are prepared in accordance with FRS 102, which includes the amendments as a result of the triennial review 2017 and are presented on the basis of the historical cost convention, except for investment properties and derivative financial instruments which have been measured at fair value in accordance with FRS 102 and as permitted by the Fair Value Directive as implemented in the Companies Act 2006.

The financial statements are presented in Sterling and are rounded to the nearest million pounds (£m), except when otherwise noted.

The Company has adopted the following standards that are relevant to these financial statements instead of those of FRS 102: • IFRS 8 ‘Operating Segments’ as endorsed by the EU, as permitted by FRS 102 Section 1 paragraph 5 (‘FRS 102.1.5’) • IFRS 9 ‘Financial Instruments’ as endorsed by the European Union (‘EU’).

The Company has elected to adapt the statutory formats prescribed in the Accounting Regulations for the primary financial statements as permitted by FRS 102 and the Accounting Regulations, allowing for a consistent format to be applied in line with the presentation of the consolidated accounts.

Individual entity financial statements The Company has taken advantage of the exemption provided by Section 400 of the Companies Act 2006 from the requirement to prepare consolidated financial statements as it is a wholly-owned subsidiary of FGP Topco Limited and its subsidiary undertakings are included in the consolidated financial statements of that company for the year ended 31 December 2019. The financial statements present information about the Company as an individual entity only and not as a group.

Primary financial statements format The primary financial statements are prepared in accordance with FRS 102, as it applies to the Company financial statements for the year ended 31 December 2019, as per Section 301(A) under FRS 102.

A columnar approach has been adopted in the income statement and the impact of certain items is shown in a separate column. This column includes certain re-measurements as listed in (i) and (ii) below, which management separates from the underlying operations of the Company. Also, this column includes the effect on taxation of changes in tax rates in (iii) and (iv) below. By isolating certain re-measurements management believes the underlying results provides the reader with a more meaningful understanding of the performance of the Company, by concentrating on the matters over which it exerts influence, whilst recognising that information on these additional items is available within the financial statements, should the reader wish to refer to them.

The column ‘certain re-measurements’ in the income statement contains the following items: (i) fair value gains and losses on investment property revaluations and disposals, (ii) derivative financial instruments, (iii) the associated tax impacts of the items in (i) and (ii), and (iv) the impact on deferred tax balances of known future changes in tax rates.

ANNUAL REPORT AND ACCOUNTS 120

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Going concern The directors have prepared the financial statements on a going concern basis as they have a reasonable expectation that the entity has adequate resources to continue in operational existence for the foreseeable future.

The ultimate parent of Heathrow Airport Limited is FGP Topco Limited. The Heathrow group of entities raises finance within a consolidated securitised group Heathrow SP Limited ‘Heathrow SP’ and its parent company Heathrow Finance Plc ‘Heathrow Finance’.

Heathrow Airport Limited is a subsidiary of Heathrow SP Limited and therefore part of the securitised group. In concluding on the going concern of Heathrow Airport Limited the directors have considered the ability of Heathrow SP to continue to have access to finance for a period of 12 months.

The directors have considered the potential impact of COVID-19 on cash flow and liquidity over the next 12 months and the corresponding impact on the covenants associated with Heathrow SP’s financing arrangements. During Q1 steps have been taken to access significant additional liquidity and Heathrow SP has drawn down an additional £1,531 million of pre- agreed facilities, and raised an additional £80 million in Class A debt. Consequently, Heathrow SP held cash and cash equivalents of £2,486 million as at 31 March 2020. Total debt maturity within Heathrow SP for the next 12 months is £250 million. The wider Heathrow Group (which includes Heathrow Finance and Heathrow SP) has cash and committed facilities of circa. £3.2 billion available. No debt matures outside of Heathrow SP for the next 12 months. The directors have modelled revised cash flow projections for Heathrow SP, in the context of the significant impact of COVID-19 on the aviation industry, reflecting the additional operational and financial risks and have considered the following: - the forecast revenue and operating cash flows from the underlying operations, - the forecast level of capital expenditure, and - the overall Group liquidity position, including cash resources, the remaining committed and uncommitted facilities available to it, its scheduled debt maturities, its forecast financial ratios and its ability to access the debt markets. The models have included the impacts of several important steps to reduce operating expenditure including temporarily shrinking our operation, cancelling executive pay, a companywide pay reduction and bonus cancellation, freezing recruitment and removing all non-essential costs. Steps have also been taken to adjust Heathrow’s capital expenditure which we anticipated being around £500 million in the current year. In modelling the impact of COVID-19, notably the rate at which passenger numbers will return from the around 97% reduction expected in April, there is a significant degree of uncertainty given the evolving current environment and the wide range of potential forecasts being formed by various stakeholders in the global aviation industry. This element of the forecasting is therefore inherently subjective.

In reaching our going concern conclusion the directors have therefore considered several potential downside scenarios. These scenarios were prepared by internal experts and challenged by our governance committees. Our stress test was considered to represent a downside scenario which was worse than forecasts provided by others in the market. We continue to monitor available evidence and will update our forecasts as more information becomes available.

Having modelled various scenarios, and the corresponding impact on various debt covenants, the Directors have a reasonable expectation that there will be no default event triggering a repayment of external debt within the Heathrow SP group of companies within the going concern period.

We have also considered the potential impact of Covid-19 on other entities within the group above Heathrow SP notably Heathrow Finance. We noted that the directors of the entity have confirmed there is appropriate cash held within Heathrow Finance Plc to meet forecast commitments for the next 12 months and no capital repayments were due until 2024. The directors continue to assess the longer term impact of COVID-19 on default covenants and the possible mitigating actions that would be implemented if necessary. Default covenants within Heathrow Finance are assessed based on the financial year ended 31 December 2020 and compliance certificates are not due for submission until June 2021.

In conclusion, having had regard to both liquidity and debt covenants for Heathrow Airport Limited, Heathrow SP and Heathrow Finance, the Directors have concluded that there will be sufficient funds available for at least twelve months from the date of these accounts.

ANNUAL REPORT AND ACCOUNTS 121 Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes and consists primarily of:

Aeronautical • Aircraft landing charges levied according to noise, emissions and weight recognised on landing. • Aircraft parking charges based on time parked and whether aircraft are wide or narrow bodied as provided. • Passenger charges based on the number of departing passengers on departure. • Other charges levied for passenger and baggage operations when these services are rendered.

Retail • Concession fees from retail and commercial concessionaires at the airport are based upon reported revenue by concessionaires, taking into account contracted minimum guarantees where appropriate, and are recognised in the period to which they relate. • Car parking income is recognised on the date of arrival at the car park, in the case of pre-booked parking, or on the date of departure from the car park in the case of pay–on-exit, in accordance with operator management fee arrangements.

Other Regulated Charges (‘ORCs’)

Revenue in relation to ORC’s is derived from the recovery of certain costs incurred by the airport. It includes: • Usage charges made for operational systems (e.g. check-in desks), recognised as each service is provided. • Charges related to passengers with restricted mobility and various other services recognised at the time of delivery. • Other invoiced sales, recognised on the performance of the service.

Other • Property letting rentals recognised on a straight-line basis over the term of the rental period. • Proceeds from the sale of trading properties, recognised on the unconditional completion of the sale. • Rail ticket sales; where tickets are booked in advance the revenue is recognised when the ticket is first used. Where tickets are bought at a rail station, the revenue is recognised immediately at the point of sale.

Contributions On occasions, the Company may receive capital grants from public bodies to improve airport infrastructure considered to be in the best interest of the public. These are required to be presented as deferred income and released to the income statement over the useful life of the asset. The asset is shown at gross cost and a deferred income creditor is also shown.

Finance income Finance income is recognised when it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably. Finance income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the asset’s net carrying amount on initial recognition.

Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until the asset is complete and available for use. Such borrowing costs are capitalised whilst projects are in progress.

Where assets in the course of construction are financed by specific borrowing facilities the interest rate relating to those specific borrowing facilities is used to calculate the amount to capitalise, otherwise an interest rate based on the weighted average cost of debt is used. Capitalisation of interest ceases once the asset is complete and available for use. Interest capitalised is then charged to the income statement as a depreciation expense over the life of the relevant asset.

All other borrowing costs, including costs incurred in respect of the maintenance of the Company’s credit setting, are recognised in the income statement in the year in which they are incurred.

ANNUAL REPORT AND ACCOUNTS 122

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Internally-generated intangible assets Development expenditure incurred in respect of individual projects is capitalised when the future economic benefit of the project is probable and is recognised only if all of the following conditions are met: • the Company can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the Company can demonstrate how the intangible asset created will generate future economic benefits; • the Company has available the resources to complete the asset; • the Company intends to complete that asset and has the future ability to sell or use the asset; and • the development cost of the intangible asset can be measured reliably.

Following initial recognition of the development expenditure as an asset, the cost model is applied requiring the asset to be held at cost less any accumulated amortisation and impairment. Amortisation begins when development is complete and the asset is ready for use.

This type of expenditure primarily relates to internally developed software and website projects and these are amortised on a straight-line basis over their useful lives of three to seven years. During the period of development, the asset is tested for impairment annually.

Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Purchased intangible assets (software costs) Computer software costs principally relate to operating and financial software. These assets are amortised on a straight line basis over their useful lives of between four and fifteen years. The assets are assessed for impairment whenever there is indication that the intangible asset may be impaired.

Tangible fixed assets Operational assets Terminal complexes, airfield assets, plant and equipment, rail assets and other land and buildings are stated at cost less accumulated depreciation and accumulated impairment losses. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected. Any gain or loss arising on the derecognition of the asset is included in the income statement in the period of derecognition.

Assets in the course of construction are stated at cost less any impairment. Assets in the course of construction are transferred to completed assets when substantially all the activities necessary to get the asset ready for use are complete and the asset is available for use. Where appropriate, cost includes borrowing costs capitalised (see “Borrowing Costs” policy), own labour costs of construction-related project management and directly attributable overheads. Costs associated with projects that are in the early stages of planning are capitalised where the directors are satisfied that it is probable the necessary consents will be received and the projects will be developed to achieve a successful delivery of an asset such that future commercial returns will flow to the Company. The Company reviews these projects on a regular basis to determine whether events or circumstances have arisen that may indicate that the carrying amount of the asset may not be recoverable, at which point the asset would be assessed for impairment.

Heathrow expansion Assets in the course of construction include qualifying costs in respect of Heathrow expansion following the Government decision in October 2016 in favour of Heathrow, and subsequent Board decision in October 2016 to apply for the Development Consent Order.

These two events were considered by management to be a trigger point for the expansion project to proceed. Management subsequently announced publicly that the Group would apply for planning permission, in the belief that it is probable that expansion at Heathrow will be realised. As a result, the Group has started to capitalise eligible costs as ‘assets in the course of construction’.

The costs which are directly associated with, and solely for the purposes of, seeking planning consent for the delivery of new runway capacity through the Development Consent Order process are capitalised as they are directly attributable to the final design and construction of the expanded Heathrow assets.

In assessing expansion costs, the Group has regard to principles of FRS 102 and considers October 2016 to be the point at which Expansion moved from the Research phase to the Development phase, and therefore development expenditure is capitalised in line with FRS 102, section 18.

Expansion costs incurred during the research phase for the Airports Commission process and before Heathrow was named as the preferred location for new runway capacity in October 2016, were expensed in the period incurred.

ANNUAL REPORT AND ACCOUNTS 123

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Tangible fixed assets continued Depreciation Depreciation is provided on operational assets, other than land and assets in the course of construction, to write off the cost of the assets less estimated residual value by equal instalments over their expected useful lives as set out below:

Terminal complexes Useful lives Terminal building, pier and satellite structures 20 - 60 years Terminal fixtures and fittings 5 - 20 years

Airport plant and equipment: Baggage systems 15 years Screening equipment 5 - 10 years Lifts, escalators and travelators 20 years Other plant and equipment including runway lighting and building plant 5 - 20 years Tunnels, bridges and subways 50 - 120 years

Airport transit systems Rolling stock 20 years Track 50 years

Airfields Runway surfaces 10 - 15 years Runway bases 100 years Taxiways and aprons 50 years

Rail Rolling stock 8 - 40 years Tunnels 100 years Track metalwork 5 - 10 years Track bases 50 years Signals and electrification work 40 years

Plant equipment and other assets Motor vehicles 4 - 8 years Office equipment 5 - 10 years Computer equipment 4 - 5 years

Other land and buildings Short leasehold properties 3 - 20 years Leasehold improvements lower of useful economic life or period of lease

In certain circumstances, the asset life may fall outside of the boundaries disclosed above.

Asset residual values and useful lives are reviewed and adjusted, if appropriate, at each reporting date.

Impairment of assets The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. When performing this review, Heathrow is considered to form one cash generating unit (CGU) based on the interdependence of the airport cash flows and the functional organisational structure by which the airport is managed.

Investment properties Investment property, which is property held to earn rentals and/or for capital appreciation, is initially measured at cost and subsequently stated at fair value at the reporting date as determined by the directors and supported by external valuations when the fair value can be reliably measured. Gains or losses arising from changes in the fair value of investment property are recognised in the income statement in the period in which they arise.

Gains or losses on disposal of an investment property are recognised in the income statement on the unconditional completion of the sale.

The revaluation reserve includes historic gains and losses on investment properties. Future gains and losses will be recognised in the income statement and transferred to the revaluation reserve. The gains and losses will remain in the revaluation reserve as a matter of course and will only be transferred to the profit and loss reserve as part of a capital reconstruction or on disposal of the investment property. ANNUAL REPORT AND ACCOUNTS 124

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Company as a lessee Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

Leases where the lessor retains a significant portion of the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Company as a lessor Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and with the exception of investment properties discussed above, the assets are included in property, plant and equipment and depreciated over their estimated useful lives. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income.

Investment in subsidiary Investments are held at cost less impairment and reviewed for impairment if there are indications that the carrying value may not be recoverable.

Inventories Raw materials and consumables consist of engineering spares and other consumable stores. Cost is calculated using the weighted average method. These are valued at the lower of cost and estimated selling price less costs to complete and sell.

Deferred income Amounts received prior to the delivery of goods and services are recorded as deferred income and released to the income statement as the services are delivered or when the goods are delivered.

Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the best estimate of the expenditure required to settle the obligation at the reporting date and are discounted, where material, to present value using a current, pre-tax rate that reflects, where appropriate, the risks specific to the liability.

Restructuring A restructuring provision is recognised when the Company has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity.

Home loss payment A home loss payments provision is recognised where, an obligation arises during the year, as a result of a past event. The home loss payment provision is in respect of historic property purchases and related expenditures created in 2016 specifically in respect of Heathrow Expansion, following the Government’s decision in October 2016.

ANNUAL REPORT AND ACCOUNTS 125

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Financial instruments The results of the Company are included in the audited consolidated financial statements of FGP Topco Limited for the year ended 31 December 2019. The results are also included in the audited consolidated financial statements of Heathrow Airport Holdings Limited, Heathrow Finance plc and Heathrow (SP) Limited for the year ended 31 December 2019.

Recognition and derecognition Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the financial instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred.

A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

Classification and initial measurement of financial assets All financial assets are initially measured at fair value adjusted for transaction costs (where applicable).

Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories: • amortised cost. • fair value through profit and loss (FVTPL). • fair value through other comprehensive income (FVOCI).

The classification is determined by both: • the entity’s business model for managing the financial asset. • the contractual cash flow characteristics of the financial asset.

Subsequent measurement of financial assets Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL): • they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows. • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at fair value through profit and loss (FVTPL) Financial assets that are held within a different business model other than ‘hold to collect’ or ‘hold to collect and sell’ are categorised at fair value through profit and loss. Further, irrespective of business model financial assets whose contractual cash flows are not solely payments of principal and interest are accounted for at FVTPL. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply.

Financial assets at fair value through other comprehensive income (FVOCI) The Company accounts for financial assets at FVOCI if the assets meet the following conditions: • they are held under a business model whose objective it is “hold to collect” the associated cash flows and sell, and • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Any gains or losses recognised in other comprehensive income (OCI) will be recycled upon derecognition of the asset.

ANNUAL REPORT AND ACCOUNTS 126

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Impairment of financial assets IFRS 9’s impairment requirements use more forward-looking information to recognise expected credit losses – the ‘expected credit loss (ECL) model’.

Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost and FVOCI, trade receivables and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss.

Recognition of credit losses is no longer dependent on the Company first identifying a credit loss event. Instead the Company considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

In applying this forward-looking approach, a distinction is made between:

• financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’), • financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’), and • ‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date.

‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category.

Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument.

Trade and other receivables Trade receivables, which generally have 14-day terms, are initially recognised and carried at their transaction price. Balances are written off when the probability of recovery is remote.

The Company makes use of a simplified approach in accounting for trade and other receivables and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument.

The Company uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses.

The Company assess impairment of trade receivables on a collective basis where they possess shared credit risk characteristics they have been grouped based on sector industry global default rates. Refer to Note 10 for a detailed analysis of how the impairment requirements of IFRS 9 are applied.

The assessment of impairment for trade receivables can either be individually or collectively and is based on how an entity manages its credit risk. As the Company has a small number of receivables with large value and these receivables are managed on an account basis (i.e. individually) it is therefore not appropriate to base the impairment on a provision matrix as such a matrix would unlikely be in line with the expected credit loss of the individual receivable.

Intercompany loans receivable Intercompany advances to other Group entities are all held till maturity, neither parties have an option to call or prepay the loan before the contracted maturity date.

Such assets are held under a business model to hold and collect contractual cash flows and therefore meet the Solely Payments of Principal and Interest (SPPI) test. No embedded derivatives are currently recognised in these advances, and the amortised cost classification is not impacted. All intercompany advances are assessed for impairment under the IFRS 9 “expected credit losses model” (ECL).

Cash and cash equivalents For the purposes of the balance sheet, cash and cash equivalents comprise cash at bank, cash in hand, repurchase agreements with an original maturity of three months or less and short-term deposits with an original maturity of three months or less. Short-term deposits with an original maturity of over three months are shown within current trade and other receivables.

Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that provides a residual interest in the assets of a business after deducting all other liabilities. ANNUAL REPORT AND ACCOUNTS 127

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Classification and measurement of financial liabilities The Company’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Company designated a financial liability at fair value through profit and loss.

Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments).

All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income.

Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred and are subsequently stated at amortised cost. Any difference between the amount initially recognised (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings being novated or cancelled and re-issued, with a substantial modification of the terms, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability, with any resulting gain or loss recognised in the income statement.

Borrowings from Company undertakings include the balance of the Borrower Loan Agreements (‘BLAs’) payable by the Company to Heathrow Funding Limited. Advances under the BLAs are secured and are issued on substantially the same terms as the bonds issued by Heathrow Funding Limited. The advances are carried at amortised cost with the interest expense recognised using the effective interest method. The nominal amount of the index-linked borrowings is accreted for the RPI component recognised within interest payable in the income statement.

Debt issue costs Prepaid fees in relation to the future issuance of debt are held on the statement of financial position on the basis that such issuance is considered probable. If issues do not occur, or are deemed not to be probable, such fees are recognised in the income statement.

Trade and other payables Trade and other payables are non-interest bearing and are stated at their fair value and subsequently measured at amortised cost using the effective interest method.

Financial liabilities and reserves Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that provides a residual interest in the assets of a business after deducting all of other liabilities.

Amounts owed to Group undertakings Amounts owed to Group undertakings are recognised initially at fair value, net of transaction costs incurred and are subsequently stated at amortised cost. Any difference between the amount initially recognised (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. Derivatives includes interest rate swaps, index-linked swaps and foreign exchange contracts.

Changes in their fair value of derivatives are recognised in profit and loss.

Novation of financial instruments

Derivative financial instruments novated from other companies within the Heathrow Airport Holdings Group are transferred at fair value prevailing on that date.

Accounting for changes in credit risk Accounting standards require that the fair value of financial instruments reflects their credit quality, and also changes in credit quality where there is evidence that this has occurred. The credit risk associated with the Company’s derivatives is updated monthly based on current market data.

ANNUAL REPORT AND ACCOUNTS 128

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Shared Services Agreement (‘SSA’) All employees of the Company are employed by LHR Airports Limited with the exception of non-senior management at Heathrow Express Operating Company Limited. LHR Airports Limited grants all employee benefits and sponsors the defined benefit pension schemes while Heathrow Airport Limited incurs any staff related costs.

On 18 August 2008, Heathrow Airport Limited and Heathrow Express Operating Company Limited entered into a SSA with LHR Airports Limited by which the latter became the shared services provider for the Group.

Following the disposal of Aberdeen, Glasgow and Southampton airports in December 2014 the directors reassessed the Company’s relationship with LHR Airports Limited, given that the sole operating airport is now Heathrow and noted the following;

• The SSA states that the operating entities, being only Heathrow Airport Limited from 1 January 2015, are responsible for pension costs on LHR Airports Limited’s retirement benefit schemes, • The Company is responsible for funding the retirement benefit schemes, paying employer contributions directly to the pension scheme, and • Although employees remain legally employed by LHR Airports Limited, the Company makes all employment decisions. LHR Airports Limited is not deemed to be providing a service, substantive or otherwise in relation to employees, to the Group.

Employment costs The Company incurs the cost of people which are contractually employed by LHR Airports Limited but provide services to the operation of the airport. Employment costs include wages and salaries, pension costs, medical costs and redundancy payments, as well as any other associated expenses properly incurred by the employees of LHR Airports Limited in providing the services.

Retirement benefit obligations LHR Airports Limited has both defined contribution and defined benefit pension schemes. LHR Airports Limited is an indirect subsidiary of HAH Group (the ‘Group’), is the sponsor of the Defined Benefit (‘DB’) pension scheme, the Unfunded Unapproved Retirement Benefit (‘UURBS’) scheme and the Post-Retirement Medical Benefits (‘PRM’) scheme.

Following a decision to re-assess the Company’s relationship with the legal sponsor of the retirement benefit schemes, it was determined that Heathrow Airport Limited, and therefore the Company, should act as the sponsor in relation to these schemes. As a result, the Company now recognises retirement benefit obligations within its financial statements.

Obligations for contributions to the defined contribution pension scheme are recognised as an expense in the income statement as incurred.

The cost of providing benefits under the defined benefit pension scheme is determined using the projected unit method, which attributes entitlement to benefits to the current period (to determine current service cost) and to the current and prior periods (to determine the present value of the defined benefit obligation) and is based on actuarial advice. Past service costs are recognised in the income statement on a straight-line basis over the vesting period or immediately if the benefits have vested. When the benefit of a plan is changed or when a plan is curtailed, the resulting change that related to past service or the gain or loss on curtailment is recognised immediately in the Statement of profit or loss. When a settlement occurs, the obligation and related plan asset are remeasured using current actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which the settlement occurs.

Net interest is calculated by applying a discount rate to the net defined benefit liability or asset.

The Company recognises actuarial gains and losses in full in other comprehensive income (‘OCI’) in the period in which they occur. Remeasurements of the net defined benefit liability are recognised immediately in OCI.

The defined benefit pension asset or liability in the statement of financial position comprises the total for each plan of the present value of the defined benefit plan obligation (using a discount rate based on high-quality corporate bonds), less any past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information and in the case of quoted securities is the published bid price. The value of a net defined benefit pension asset is restricted to the sum of any unrecognised past service costs and the present value of any amount the Group expects to recover by way of refunds from the plan or reductions in future contributions.

Current and deferred taxation The tax expense for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in other comprehensive income. In this case, the tax is recognised in other comprehensive income.

Current tax liabilities are measured at the amount expected to be paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date.

ANNUAL REPORT AND ACCOUNTS 129

Heathrow Airport Limited

Accounting policies for the year ended 31 December 2019 continued

Current and deferred taxation continued Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.

In accordance with FRS 102 Section 29 timing differences, deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements.

Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.

Deferred taxation is determined using the tax rates and laws that have been enacted, or substantively enacted, by the balance sheet date and are expected to apply in the periods in which the timing differences are expected to reverse.

Share capital Ordinary shares are classified as equity and are recorded at the par value of proceeds received, net of direct issue costs allowing for any reductions in the par value. Where shares are issued above par value, the proceeds in excess of par value are recorded in the share premium reserve.

Preference shares Preference shares are classified as liabilities when in substance the shares and the related dividends have terms similar to liabilities and not share capital. Features that indicate that presentation as a liability is appropriate include dividends that are payable for a fixed or determinable amount at a fixed or determinable future date and where redemption is at a predetermined amount and date or at the option of the preference shareholder and not at the discretion of the Company. Where presentation as a liability is considered appropriate, the associated dividend expense is shown within interest in the income statement.

Dividend distribution A dividend distribution to the Company’s shareholder is recognised as a liability in the Company’s financial statements in the period in which the shareholder’s right to receive payment of the dividend is established.

Foreign currency The Company financial statements are presented in Sterling, which is the Company’s functional currency.

Transactions denominated in foreign currencies are initially recorded in the entity’s functional currency applying the spot exchange rate using the exchange rates prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into Sterling at the rates of exchange ruling at the reporting date. Differences arising on translation are charged or credited to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Related party disclosures The Company is exempt under the terms of FRS 102 from disclosing related party transactions with entities that are wholly- owned subsidiaries of the FGP Topco Limited Group. Under FRS 102 it is also exempt from providing certain other disclosures regarding key management personnel.

Cash flow statement The ultimate parent entity in the UK is FGP Topco Limited, a company registered in England and Wales.

The results of the Company are included in the audited consolidated financial statements of FGP Topco Limited for the year ended 31 December 2019. The results are also included in the audited consolidated financial statements of Heathrow Airport Holdings Limited for the year ended 31 December 2019 (intermediate parent entity and the smallest group to consolidate these financial statements). Consequently, the Company has taken advantage of the exemption from preparing a cash flow statement under the terms of accounting standard FRS 102 (1.12 (b) and (e)).

ANNUAL REPORT AND ACCOUNTS 130

Heathrow Airport Limited

Significant accounting judgements and estimates for the year ended 31 December 2019

In applying the Company’s accounting policies management have made judgements and estimates in a number of key areas. Actual results may, however, differ from the estimates calculated and management believes that the following areas present the greatest level of uncertainty.

Critical judgements in applying the Company’s accounting policies

Capitalisation Management are required to make judgements in relation to the capitalisation of costs. This relates to both when amounts may begin to be capitalised, where there may be doubt about planning consent or the ultimate completion of the asset, and in relation to the nature of costs incurred. Judgement has been exercised in the year including in relation to: • the assessment of assets in the course of construction, including expansion costs; • assessing the useful economic life of an asset; and • when a project moves from the research phase (where costs must be expensed in the current period) to the development phase and hence may be capitalised as the future economic benefit of the project becomes probable and the principles of FRS 102 Section 18 are considered and applied.

In relation to Heathrow Expansion, judgement has been exercised in the determination that it is probable that Heathrow Expansion will go ahead. Management has concluded that it is improbable that the appeal of the Judicial review of the Airports National Policy Statement decisions will rule against the Government. Management has also concluded that the result of the UK 2019 General Election and related political uncertainty, as well as the uncertainty over the regulatory model to support investment and the response to CAA CAP 1871: Economic Regulation at Heathrow Airport, does not change the judgement. Accumulated Assets in the Course of Construction of £450 million related to Heathrow Expansion are recorded in the balance sheet at 31 December 2019.

Useful economic life (UEL) and depreciation Calculation of depreciation and the retention of assets on the fixed asset register requires management to make judgements regarding the useful economic lives of fixed assets. These judgements are based on Heathrow’s experience of similar assets, engineering data, and industry standards.

Where management identifies that actual UELs differ from those estimated, the UELs are adjusted in the period that the difference is identified. As Heathrow makes significant investment in PP&E during Expansion and continues to most efficiently utilise existing assets by extending lives where appropriate, the differences between the estimated and actual UELs could have a positive or negative impact on the financial statements.

Agent versus Principal The presentation of certain costs including employment costs and pension costs which are a contractual obligation of LHR Airports Limited are presented as Operating costs of Heathrow Airport Limited in the 2019 financial statements based on an assessment of which entity is principal in relation to these transactions. This judgement is described in the accounting policies and is based on the balance of risks and rewards between group companies.

Lease classification A lease contract is classified as an operating or a finance lease based on the substance of the contract and whether the Company or the lessor have the substantial risks and benefits incidental to the ownership of the leased asset.

The Company has a lease agreement with UK Power Networks Services Limited (‘UKPNS’ / ‘Lessor’) relating to the electricity distribution network at Heathrow. The lease expires in 2083. The Company has determined this arrangement to be an operating lease rather than a finance lease under section 20 of FRS 102. In this arrangement, the typical primary indicators of a finance lease under section 20 such as the lease term being for the major part of the economic life of the asset, the present value of the minimum lease payment amounts being substantially all of the fair value of the leased asset, appear to be met, largely due to the duration of the agreement. The substance of the agreement however results in significant risks and rewards associated with the ownership of electrical distribution network remaining with UKPNS. Other features within the contract that are more relevant in this lease determination include that the obligation to operate, maintain, insure and repair rests with the lessor rather than the Company. Accordingly, management believe an operating lease classification to be appropriate.

Investment properties Investment properties are fair valued by CBRE Limited, Chartered Surveyors. The valuations are prepared in consideration of FRS 102 and in accordance with the appraisal and valuation manual issued by the Royal Institution of Chartered Surveyors. Valuations are carried out having regard to comparable market evidence relevant to each specific property or class of properties. In assessing fair value, current and potential future income (after deduction of non-recoverable outgoings) is capitalised using yields derived from market evidence. This market evidence also considers planned transactions and use of the property (for example the future expansion of Heathrow). Independent valuations are obtained for all investment properties.

ANNUAL REPORT AND ACCOUNTS 131

Heathrow Airport Limited

Significant accounting judgements and estimates for the year ended 31 December 2019

Investment properties continued Judgement is exercised in adjusting cash flows to reflect what a ‘Reasonably Efficient Operator’ would be able to achieve outside of the economies of scale achieved by Heathrow when operating a portfolio of car parks. These judgements are needed so that each car park can be valued on an individual basis and include judgements on the “Fair Maintainable Turnover” that would be achievable and a determination on the allocation of business rates and operating cost inefficiencies.

Key sources of estimation uncertainty

Investment properties Management have reviewed the main assumptions underlying the valuation of Investment properties and provide sensitivity analysis based on reasonable possible changes to relevant assumptions. The main estimations made that have a significant risk of resulting in a material adjustment to the carrying amounts of investment properties within the next financial year have been assessed as those related to Car Parks.

Car parks are valued individually based on actual data on revenue in the current year and expectations of future growth rates. Sensitivities have been run to analyse the impact of a reasonable change in growth rates and a reasonable change in base year revenue informed by discussions with CBRE and internal Heathrow car park experts. Estimations are also made concerning expectations of future growth rates of operating costs including business rates. The results of the sensitivities are shown in Note 6 to the accounts.

Retirement benefit obligations Certain assumptions have been adopted for factors that determine the valuation of the Company’s liability for pension obligations at the period end and charges to the income statement. The assumptions have been determined in consultation with the Company’s actuary considering market and economic conditions. Assumptions can vary from period to period because of changing conditions and other determinants which may cause increases or decreases in the valuation of the Company’s liability for pension obligations.

The objective when setting pension scheme assumptions for future periods is to reflect the expected actual outcomes, other than the discount rate which must be set by reference to the yield on high quality corporate bonds with a term consistent with the obligations. The impact of the change in assumptions on the valuation of the net financial position of the Company pension scheme is recorded as a net actuarial gain or loss and is reflected in the statement of comprehensive income.

The triennial Trustee valuation of the scheme was completed during 2019 and included updates to mortality rates as well as other key demographic indicators, which have been used to inform management assumptions used at 31 December 2019.

Management have reviewed the main assumptions underlying the valuation of Retirement benefit obligations. The main estimations made that have a significant risk of resulting in a material adjustment to the carrying value of the assets and liabilities relating to the scheme have been assessed as: a) Discount rate, b) Inflation rates, and c) Mortality/Life expectancy changes.

Sensitivities have been run to analyse the impact of a reasonable change in these estimations informed by discussions with scheme actuaries KPMG and internal Heathrow experts. The results of the sensitivities are shown in Note 15 of the Financial Statements.

ANNUAL REPORT AND ACCOUNTS 132

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019

1 Revenue The Company is organised into business units according to the nature of the services provided to Airport users. All revenue arises in United Kingdom and is derived from Aeronautical and commercial operations within the Airport and its boundaries.

Year ended Year ended 31 December 31 December 2019 2018 £m £m Revenue Aeronautical Landing charges 549 482 Parking charges 74 67 Departing charges 1,208 1,196 Total aeronautical revenue 1,831 1,745 Other regulated charges 239 243 Retail 722 716 Other revenue 184 170 Total revenue 2,976 2,874

Adjusted EBITDA Total adjusted EBITDA 1,828 1,792

Reconciliation to statutory information: Depreciation and amortisation (736) (742) Operating profit (before certain re-measurements) 1,092 1,050

Fair value gain on investment properties (certain re-measurements) 43 117 Operating profit 1,135 1,167

Finance income 206 193 Finance costs (522) (758) Profit before tax 819 602

Taxation charge (188) (156)

Profit for the year 631 446

Revenue of £882 million (2018: £884 million) was derived from a single external customer and has been included within the aeronautical revenue.

ANNUAL REPORT AND ACCOUNTS 133

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

2 Operating costs Operating costs comprise: Year ended Year ended 31 December 31 December 2019 2018 £m £m Employment Wages and salaries 346 316 Social security 35 34 Pension 41 47 Other staff related costs 27 21 Own staff costs capitalised (82) (63) 367 355 Operational 290 252 Maintenance 163 165 Rates 116 119 Utilities 94 88 Other 118 103 Operating costs before depreciation and amortisation 1,148 1,082 Depreciation and amortisation Property, plant and equipment 693 715 Intangible assets 43 27 736 742

Total operating costs 1,884 1,824

Rentals under operating leases Year ended Year ended 31 December 31 December 2019 2018 £m £m Operating costs include: Land and buildings1 14 14 Other2 33 31 Total rentals under operating leases 47 45 1 The Company leases various offices and warehouses under non-cancellable operating lease agreements. The leases have various terms, escalation clauses and renewal rights. The amounts above are stated net of discounts. 2 A significant portion of the operating rental costs relates to electricity supply equipment at the airport leased on agreement with UK Power Networks Services Limited (‘UKPNS’).

ANNUAL REPORT AND ACCOUNTS 134

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

2 Operating costs continued Auditor’s remuneration Audit fees and non-audit fees for the SP Group and FGP Topco Group for the current and preceding financial years were borne by Heathrow Airport Limited.

Year ended Year ended 31 December 31 December 2019 2018 £m £m Fees payable to the Company’s auditor for the annual audit of the: Company’s ultimate parent 0.1 0.1 Company’s subsidiaries1 0.4 0.4 Total audit fees 0.5 0.5

Fees payable to the Company’s auditor and their associates for other services specific to the Group Audit related assurance services 0.5 0.1 Other assurance services 0.1 0.1 Other services 0.1 0.1 Total non-audit fees 0.7 0.3 Total fees 1.2 0.8 1 Fees payable to the Company’s auditor for the audit of the Company’s annual accounts was £65,000 (2018: £62,000).

Employee information The Company has a monthly average of 7,641 employees (2018: 6,743) who are all employed to provide services to the operation of the airport. The directors note that although the employees remain legally employed by LHR Airports Limited, the Company makes all employment decisions. Consequently, employee numbers for those providing services to the operation of the airport are reported in the financial statement of the Company and not in the financial statements of LHR Airports Limited.

Directors’ remuneration Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000 Aggregate emoluments1,2 5,178 7,162 Value of Company pension contributions 30 30 5,208 7,192 1 For the year ended 31 December 2019 salaries and benefits include salaries, allowances, Directors’ fees, Company pension contributions, accrued bonuses and amounts payable under long-term incentive plans ('LTIP'). 2 £905,000 of bonus was paid in cash in 2019 (2018: £1,274,000).

John Holland-Kaye and Javier Echave were directors of a number of companies within the Heathrow Airport Holdings Group, including LHR Airports Limited, during the year. Their remuneration for the year ended 31 December 2019 was disclosed in the financial statements of Heathrow Airport Holdings Limited. The directors do not believe it is possible to accurately apportion their remuneration to individual companies based on services provided and therefore their remuneration is not included in the numbers above.

The directors participate in various Long-Term Incentive Performance Cash Plans. In respect of the Plans, a cash amount is granted which could vest in future periods contingent on achieving or surpassing EBITDA, Return on Equity and other operational targets over two, three or four. Directors emoluments in 2019 includes £1,424,000 in respect of the 2017 three- year plan after certain EBITDA and Return on equity targets were met over the three years from 2017 to 2019, which will be paid in 2020.

Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000 Highest paid director’s remuneration Aggregate emoluments1,2 1,067 1,744 1 For the year ended 31 December 2019 salaries and benefits include salaries, allowances, directors’ fees, Company pension contributions, accrued bonuses and amounts payable under long term incentive plans ('LTIP'). 2 £243,000 of bonus was paid in cash in 2019 (2018: £271,000).

ANNUAL REPORT AND ACCOUNTS 135

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

2 Operating costs continued Directors’ remuneration continued The highest paid director participates in various Long-Term Incentive Performance Cash Plans. In respect of the Plans, a cash amount is granted which could vest in future periods contingent on achieving or surpassing EBITDA, Return on Equity and other operational targets over two, three or four. The highest paid Director's emoluments in 2019 includes £347,000 in respect of the 2017 three-year plan after certain EBITDA and Return on equity targets were met over the three years from 2017 to 2019, which will be paid in 2020.

Year ended Year ended 31 December 31 December 2019 2018 Number of directors who are members of a: Defined contribution pension scheme 4 4

No directors (2018: none) exercised share options during the year in respect of their services to the Heathrow Airport Holdings Group and no shares (2018: none) were received or became receivable under long-term incentive plans.

3 Financing

(i) Net finance costs before certain re-measurements

Year ended Year ended 31 December 31 December 2019 2018 Note £m £m Finance income Interest receivable from group undertakings1 197 192 Interest on deposits 9 1 206 193 Finance costs Interest payable to group undertakings2 (624) (676) Interest on bank borrowings (26) (23) Facility fees and other charges (10) (7) Net pension finance costs (1) (4) (661) (710) Less: capitalised borrowing costs3 5 44 50 (617) (660) Net finance costs before certain re-measurements (411) (467) 1 These amounts relate primarily to interest accrued on balances due from Heathrow (SP) Limited (Note12). 2 These amounts relate mainly to interest due on the Borrower Loan Agreement (‘BLA’) advances and back-to-back derivatives not in hedge relationship with Heathrow Funding Limited. 3 Capitalised interest included in the cost of qualifying assets arose on the general borrowing pool and is calculated by applying an average capitalisation rate of 4.96% (2018: 5.66%) to expenditure incurred on such assets.

(ii) Fair value (loss)/gain on financial instruments

Year ended Year ended 31 December 31 December 2019 2018 £m £m Interest rate swaps (15) 89 Index-linked swaps 112 (187) FX re-translation of foreign exchange contracts (2) - Fair value gain/(loss) on financial instruments 95 (98)

Net finance costs (316) (565)

ANNUAL REPORT AND ACCOUNTS 136

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

4 Taxation Year ended Year ended 31 December 31 December 2019 2018 £m £m UK corporation tax Current tax charge at 19% (2018: 19%) (94) (90) Group relief payable (53) (48) Over provision in respect of prior years 7 5 Deferred tax Current year charge (47) (14) Prior year charge (1) (9) Taxation charge for the year (188) (156)

The tax charge on the Company’s profit before tax differs from the theoretical amount that would arise by applying the UK statutory tax rate to the accounting profits of the Company for the reasons as set out in the following reconciliation:

Year ended Year ended 31 December 31 December 2019 2018 £m £m Profit before tax 819 602

Reconciliation of the tax charge Tax calculated at the UK statutory rate of 19% (2018: 19%) (156) (114) Adjustments in respect of current income tax of previous years 7 5 Adjustments in respect of deferred income tax of previous years (1) (9) Net non-deductible expenses (43) (39) Effect of change in tax rate 5 1 Taxation charge for the year (188) (156)

The total tax charge recognised for the year ended 31 December 2019 was £188 million (2018: £156 million). Based on a profit before tax for the year of £819 million (2018: £602 million), this results in an effective tax rate of 23.0% (2018: 25.9%).

The total tax charge before certain re-measurements for the year ended 31 December 2019 was £164 million (2018: £148 million). Based on a profit before tax and certain re-measurements of £681 million (2018: £583 million), this results in an effective tax rate of 24.1% (2018: 25.4%). The tax charge is more than implied by the statutory rate of 19% (2018: 19%) primarily due to non-deductible expenses and because a substantial proportion of Heathrow’s capital expenditure does not qualify for tax relief. However, with the introduction of the new Structures and Building Allowance (SBA) (see below), a higher proportion of Heathrow’s capital expenditure will qualify for tax relief in future years, which is expected to reduce the effective tax rate.

In addition, there was a £24 million tax charge (2018: £8 million) reflecting the tax impact arising from fair value gains on investment property and property, plant and equipment revaluations and fair value gains and losses on financial instruments, along with any associated prior year adjustments.

Under legislation enacted by the balance sheet date, the headline UK corporation tax rate is 19% up to 31 March 2020 and reduces to 17% with effect from 1 April 2020. Subsequently, draft legislation in Finance Bill 2020 repeals the rate reduction and maintains the rate at 19%. At the balance sheet date this amendment had not been substantively enacted so has not been reflected in the deferred tax balances. Based on the current net deferred tax liability, a 19% corporation tax rate would increase the net deferred tax liability to an estimated £536 million, which would give rise to a £56 million deferred tax charge due to changes in tax rates.

In the November 2018 Budget the Government announced a new 2% flat rate Structures and Building Allowance relief (SBA) for non-residential structural property will be available where the construction contract is entered on or after 29 October 2018. Relief will be provided on eligible construction costs at an annual rate of 2% on a straight-line basis, effectively giving tax relief over a 50-year period. Heathrow is likely to benefit in future years from tax relief on expenditure which would not be eligible under current rules. At the balance sheet date, no material SBA-qualifying assets had been identified and brought into use.

Other than these changes there are no items which would materially affect the future tax charge.

ANNUAL REPORT AND ACCOUNTS 137

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

5 Property, plant and equipment Assets in Other the course Terminal Plant and land and of complexes Airfields equipment buildings Rail construction Total Note £m £m £m £m £m £m £m Cost 1 January 2018 11,277 2,066 891 205 1,406 893 16,738 Additions - - - - - 768 768 Borrowing costs capitalised 3 - - - - - 50 50 Disposals (2) (1) (11) - (15) - (29) Transfer to intangible assets 7 - - - - - (5) (5) Transfer to investment properties 6 - - - - - (1) (1) Transfer to completed assets 374 (112) 260 24 43 (589) - 31 December 2018 11,649 1,953 1,140 229 1,434 1,116 17,521 Additions - - - - - 850 850 Borrowing costs capitalised 3 - - - - - 44 44 Disposals (245) (65) (118) (9) (50) - (487) Transfer to intangible assets 7 - - - - - (44) (44) Transfer to completed assets 532 127 (27) 53 10 (695) - 31 December 2019 11,936 2,015 995 273 1,394 1,271 17,884

Depreciation 1 January 2018 (3,910) (463) (433) (68) (557) - (5,431) Depreciation charge (489) (44) (102) (9) (71) - (715) Disposals 3 1 10 - 15 - 29 31 December 2018 (4,396) (506) (525) (77) (613) - (6,117) Depreciation charge (492) (61) (67) (19) (54) - (693) Disposals 245 65 118 9 50 - 487 31 December 2019 (4,643) (502) (474) (87) (617) - (6,323)

Net book value 31 December 2019 7,293 1,513 521 186 777 1,271 11,561 31 December 2018 7,253 1,447 615 152 821 1,116 11,404 A review of Nil Net book value assets was performed in the year which resulted in significant disposals at Nil Net book value.

Other land and buildings Other land and buildings are freehold except for leasehold properties which is presented in note 7. Refer to the accounting policy for the changes in the accounting policies.

Assets in the course of construction The major balances in assets in the course of construction include Baggage programme projects to install the latest generation of Baggage screening machines, the Asset Management programme to replace assets at the end of their useful life, and the Airport resilience programme including tunnels and airfield improvements.

Accelerated depreciation Depreciation in 2019 includes accelerated depreciation on Heathrow Express rolling stock (£28 million accelerated depreciation in rail assets) and the Tracked Transit System (£3 million accelerated depreciation in terminal complexes) of £31 million (2018: £41 million).

Borrowing costs capitalised During the year ended 31 December 2019, borrowing costs of £44 million were capitalised (2018: £50 million). Capitalised borrowing costs were calculated by applying an average interest rate of 4.96% (2018: 5.66%) to expenditure incurred on qualifying assets. A tax deduction of £44 million (2018: £50 million) for capitalised borrowing costs was taken in the year. Subsequent depreciation of the capitalised borrowing costs is disallowed for tax purposes. Consequently, the capitalised borrowing costs give rise to a deferred tax liability, which is released each year in line with the depreciation charged on the relevant assets

Regulatory asset base (RAB) RAB at Dec 2019 was £16,598 million (2018: 16,200 million).

ANNUAL REPORT AND ACCOUNTS 138

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

6 Investment properties

Airport investment properties £m Valuation 1 January 2018 2,350 Additions 4 Transfers from property, plant and equipment 1 Investment property fair value movements 117 31 December 2018 2,472 Additions 7 Investment property fair value movements 43 31 December 2019 2,522

Investment properties were fair valued at 31 December 2019 by an external valuer, CBRE Limited. The valuers are independent and have appropriate, recognised qualifications, and experience in the categories and location of the investment properties being valued.

Management conducts a detailed review of each property to ensure the correct assumptions have been used. Meetings with the valuers are held to review and challenge the assumptions used in the valuation.

All valuations were prepared in consideration of FRS 102 and in accordance with the appraisal and valuation manual issued by the Royal Institution of Chartered Surveyors. Valuations were carried out having regard to comparable market evidence relevant to each specific property or class of properties. In assessing fair value, current and potential future income (after deduction of non-recoverable outgoings) has been capitalised using yields derived from market evidence. The higher the discount rate and expected vacancy rate, the lower the fair value. The higher the current and potential future income or rental growth rate, the higher the fair value.

The Investment Property portfolio includes Car Parks (for passengers and employees) and Maintenance Hangars, which together account for 71% (2018: 71%) of the fair value of the investment property portfolio at 31 December 2019. The valuation of Maintenance Hangers is largely based on long term contractual terms.

Increase/(decrease) in asset valuation £m Car parks – Base revenue +2.0% pa 36 -2.0% pa (36) Car parks – Revenue growth +1.0% pa 131 -1.0% pa (118) Car parks – Operating costs growth +1.0% pa (31) -1.0% pa 36

The sensitivities analysis above relating to the valuation of car parks has been determined based on reasonably possible changes to the respective assumptions, holding all other assumptions constant. The methodology used in arriving at the incremental changes shown above is consistent with that used for the valuation at the year end.

The Company has historically had a low level of void properties. Investment properties which are let, are let either on either full repair and insuring leases, under which all outgoings are the responsibility of the lessee, or under tenancies, where costs are recovered through a service charge levied on tenants during their period of occupation. This service charge amounted to less than £1 million (2018: less than £1 million) for which a similar amount is included within operating costs.

The property rental income earned by the Company from its investment property, amounted to £78 million (2018: £76 million). Direct operating expenses arising on the investment property, all of which generated rental income in the period, amounted to £1 million (2018: £1 million). The Company has entered into contracts for the maintenance of its investment property, which will give rise to an annual charge of less than £1 million (2018: less than £1 million).

Historical cost The historical cost of investment properties and land held for development as at 31 December 2019 was £690 million (2018: £679 million).

ANNUAL REPORT AND ACCOUNTS 139

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

7 Intangible assets £m Cost 1 January 2018 330 Additions 20 Transfers from property, plant and equipment 5 Disposals (2) 31 December 2018 353 Additions - Transfers from property, plant and equipment 44 Disposals (88) 31 December 2019 309

Amortisation 1 January 2018 (155) Charge for the year (27) Disposals 2 31 December 2018 (180) Charge for the year (43) Disposals 88 31 December 2019 (135)

Net book value 31 December 2019 174 31 December 2018 173

All intangible assets relate to capitalised computer software costs. These software costs principally relate to operating and financial software. These assets are being amortised over a period of between four and fifteen years. Amortisation for the year has been charged through operating costs.

8 Investment in subsidiary 31 December 31 December 2019 2018 £m £m Cost at 1 January and 31 December 42 42

Nature of % of share Class Subsidiary business capital held of share Ordinary shares Railway of Heathrow Express Operating Company Limited Operator 100 £1 each

Heathrow Express Operating Company Limited, a company registered in England and Wales, operates the express rail service between Heathrow and central London. The registered address of the company is The Compass Centre, Nelson Road, Hounslow, Middlesex, TW6 2GW.

In the opinion of the directors, the aggregate value of the shares in the subsidiary undertaking is not less than the aggregate amount at which they are stated in the Company’s statement of financial position. Investments are held at cost less impairment and reviewed for impairment if there are indications that the carrying value may not be recoverable.

9 Inventories 31 December 31 December 2019 2018 £m £m Raw materials and consumables 13 13

The total amount of inventories consumed in the year was £5 million (2018: £7 million). There is no material difference between the statement of financial position value of inventories and their replacement cost.

ANNUAL REPORT AND ACCOUNTS 140

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

10 Trade and other receivables 31 December 31 December 2019 2018 £m £m Non-current Amounts owed by group undertakings – interest bearing1 2,483 2,520 Less: provision for impairment (7) (3) Prepaid debt fees2 3 4 Prepayments 13 16 2,492 2,537 Current Trade receivables 132 120 Accrued income 46 114 Total trade receivables 178 234 Less: provision for impairment (5) (4) Trade receivables after provision for impairment 173 230 Prepayments 34 33 Amounts owed by group undertakings – interest free - 3 Interest receivable from group undertakings 195 121 Other receivables 28 21 430 408 Total trade and other receivables 2,922 2,945 1 Amounts owed by group – interest bearing represents a loan receivable from an entity within the wholly-owned group. It has a fixed interest rate of 7.57% pa and is repayable on 20 August 2021 and a promissory note at 5.37% which matures on 1 November 2021. 2 Prepaid debt fees largely relate to financing fees paid on facilities not yet drawn and are amortised over the term of the facility.

The fair value of trade and other receivables are not materially different from the carrying value.

Trade receivables are non-interest bearing and are generally on 14-day terms. No collateral is held as security.

As at 31 December 2019, trade receivables of £97 million (2018: £88 million) were fully performing. Trade receivables of £35 million (2018: £32 million) were past due. These relate to a number of independent customers for whom there is no recent history of default. Movement in the provision for impairment of trade receivables is as follows:

£m 1 January 2018 4 Impairment of trade receivables - 31 December 2018 4 Impairment of trade receivables 1 31 December 2019 5

As at 31 December 2019, trade receivables were considered for impairment under IFRS 9 resulting in an additional provision of £1 million (2018: nil). During the year ended 31 December 2018 and 2019, there are no write offs on trade receivables. The individual impaired receivables mainly relate to customers who are in difficult economic situations. The creation and release of any provisions for impaired receivables have been included in 'general expenses' within ‘operating costs’ in the consolidated income statement. Amounts charged to the provision account are generally written off when there is no expectation of recovery, with additional impairment for forward looking ECL and probable default.

IFRS 9 also required the Company to recognise a provision for impairment against amounts owed by group undertakings for which £7 million (2018: £3 million) was provided. These amounts are expected to be fully recoverable.

The Company is not exposed to significant foreign currency exchange risk as the majority of trade and other receivables are denominated in Sterling.

ANNUAL REPORT AND ACCOUNTS 141

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

11 Cash and cash equivalents and term deposits 31 December 31 December 2019 2018 £m £m Cash at bank and in hand 84 33 Short-term deposits 728 555 Cash and cash equivalents 812 588 Term deposits 725 120 Cash and cash equivalents and term deposits 1,537 708

Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates and is subject to interest rate risk. The fair value of cash and cash equivalents approximates to their book value. Heathrow Airport Limited holds investments in term deposits, which have an original maturity of more than three months.

12 Borrowings 31 December 31 December 2019 2018 £m £m Current Secured Bank loans 4 17 BLA advances from Heathrow Funding Limited 400 250 Total current (excluding interest payable) 404 267 Interest payable – external 7 5 Interest payable – owed to group undertakings 218 165 Total current 629 437 Non-current Secured BLA advances from Heathrow Funding Limited 11,740 11,280 Bank loans 8 12 Class A1 term loan due 2020 418 417 Class A2 term loan due 2024 100 100 Class A3 term loan due 2029 200 - Term notes due 2026 - 2037 723 585 Total non-current 13,189 12,394

Total borrowings 13,818 12,831

The table below analyses the contractual maturity of the Company’s borrowings falling due after more than one year:

£m £m One to two years 1,567 820 Two to five years 2,487 2,694 Over five years 9,135 8,880 13,189 12,394

Borrowings from group undertakings Heathrow Funding Limited, a fellow subsidiary company, raises funds from external sources through the issuance of external bonds and use of external derivatives. The proceeds raised are distributed to the Company under the terms of the BLAs.

Advances under the BLAs are secured and are issued on substantially the same terms as the bonds issued by Heathrow Funding Limited, taking into consideration certain of the related hedging instruments. Interest rate swaps, index-linked swaps and cross-currency swaps are entered into by Heathrow Funding Limited to hedge the SP Group’s exposures. Interest rate and index-linked derivatives are mainly passed through to the Company as back-to-back derivatives, or otherwise incorporated into the related BLAs. Cross-currency swaps are packaged with external non-sterling debt and passed through to the Company under the BLAs.

During the year, following new bonds issued by Heathrow Funding Limited, further advances were made to the Company for £857 million (2018: £771 million), net of transaction costs. In the same period, the Company made repayments of £250 million (2018: £910 million). The effective interest rate on the BLA advances varies between 0.5% and 7.39% (2018: 0.55% and 7.39%).

ANNUAL REPORT AND ACCOUNTS 142

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

12 Borrowings continued Facilities All of the facilities are carried at amortised cost.

The Company had £1,225 million undrawn committed borrowing facilities available as at 31 December 2019 (2018: £1,350 million). In addition, as at 31 December 2019, there was an overdraft limit up to a maximum net overdraft balance of £10 million (2018: £10 million).

Securities and guarantees The Company, Heathrow Express Operating Company Limited, Heathrow (SP) Limited and Heathrow (AH) Limited (together, the ‘Obligors’) have granted security to Deutsche Trustee Company Limited (in its capacity as the ‘Borrower Security Trustee’, for itself and as trustee for the Borrower Secured Creditors) over their property, assets and undertakings to secure their obligations under various financing agreements. Each Obligor has also guaranteed the obligations of each other Obligor under such financing agreements.

BAA Pension Trust Company Limited, as a trustee from time to time of the BAA Pension Scheme, is a Borrower Secured Creditor and ranks equally in an amount up to £284 million with senior (Class A) debt.

The Company and Heathrow Express Operating Company Limited have provided a guarantee and indemnity in favour of Lloyds Bank plc (in its capacity as the Borrower Account Bank) in respect of each other’s obligations under the Borrower Account Bank Agreement and associated financing agreements.

13 Derivative financial instruments Notional Assets Liabilities Total 31 December 2019 £m £m £m £m Current Foreign exchange contracts 8 - - - Interest rate swaps 738 - (10) (10) Index-linked swaps 313 - (44) (44) Total current 1,059 - (54) (54)

Non-current Foreign exchange contracts 33 (2) (2) Interest rate swaps 1,665 - (396) (396) Index-linked swaps 5,919 24 (688) (664) Total non-current 7,617 24 (1,086) (1,062) Total derivative financial instruments 8,676 24 (1,140) (1,116)

Notional Assets Liabilities Total 31 December 2018 £m £m £m £m Current Foreign exchange contracts 11 - - - Interest rate swaps 204 - (5) (5) Index-linked swaps 124 - (15) (15) Total current 339 - (20) (20)

Non-current Interest rate swaps 2,402 - (389) (389) Index-linked swaps 6,231 9 (945) (936) Total non-current 8,633 9 (1,334) (1,325) Total derivative financial instruments 8,972 9 (1,354) (1,345)

Derivative financial instruments at fair value The Company enters into derivative transactions, principally interest rate swaps, index-linked swaps and foreign exchange contracts. The purpose of these transactions is to manage interest rate, inflation and currency risks arising from the Company’s operations and sources of finance. The Company does not apply hedge accounting in relation to any of its derivative financial instruments.

Interest rate swaps As at 31 December 2019, the total notional amount of back-to-back interest rate swaps was £2,403 million which had a mark-to-market liability of £406 million (2018: £3,606 million notional with a mark-to-market liability of £394 million).

ANNUAL REPORT AND ACCOUNTS 143

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

13 Derivative financial instruments continued Index-linked swaps Index linked swaps have been entered into in order to economically hedge debt instruments and RPI linked revenue and the Regulated Asset Base (‘RAB’). Heathrow Funding Limited has entered into index linked swaps with external counterparties which have been issued to the Company as back-to-back hedges and the total notional amount of back-to- back index linked swaps was £6,232 million which had a mark-to-market net liability of £708 million (2018: £6,355 million notional with a mark-to-market net liability of £951 million).

Financial instruments at fair value by category All of the Company’s financial assets and financial liabilities that are held at fair value are classified as derivative financial instruments and are disclosed above.

Treasury risk management The Company’s financial risk management objectives are aligned with Heathrow Airport Holdings Limited, which is the level at which financial risks for the Company are managed. The treasury policies of the Heathrow Airport Holdings have been disclosed in the internal controls and risk management section of the Strategic report in its statutory annual report and financial statements.

Fair value estimation The fair value of financial instruments that are not traded in an active market (such as derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates.

Specific valuation techniques used to value financial instruments include: • market prices for credit spreads based on counterparty’s credit default swap prices and the Company’s bond spread; • the fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and • other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.

14 Deferred income tax liabilities The net movement on the deferred income tax account is as follows:

2019 2018 1 January 436 387 Charged to income statement 48 23 (Credited)/charged to other comprehensive income (4) 26 31 December 480 436

Analysis of the deferred tax balance is as follows: £m £m Excess of capital allowances over depreciation 353 331 Retirement benefit obligations 1 - Other timing differences (3) (3) Derivatives (129) (144) Revaluation of investment property to fair value 220 214 Tax on rolled over gains 8 8 Revaluations of property, plant and equipment 30 30 Deferred income tax liability 480 436

Provision has been made for deferred taxation in accordance with FRS 102. Of the £480 million liability at 31 December 2019, we expect a £1 million increase in the next 12 months (excluding any reversal arising from future fair value adjustments, as these cannot be estimated).

ANNUAL REPORT AND ACCOUNTS 144

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

15 Retirement benefit obligations The Company has applied the requirements of the standard FRS 102 section 28 ’Post-Employment Benefits’ for the year ended 31 December 2019.

LHR Airports Limited, which is an indirect subsidiary of HAH Group (the ‘Group’), is the sponsor of the Defined Benefit (‘DB’) pension scheme, the Unfunded Unapproved Retirement Benefit (‘UURBS’) scheme and the Post-Retirement Medical Benefits (‘PRM’) scheme. Following the decision of the directors in 2015 to re-assess the Company’s relationship with the legal sponsor of the retirement benefit schemes, it was determined that Heathrow Airport Limited, and therefore the Company, should act as principal in relation to these schemes. As a result, the Company now recognises retirement benefit obligations within its financial statements.

The Company’s primary UK defined benefit pension fund is a self-administered defined benefit scheme (the ‘BAA Pension Scheme’ or the ‘Scheme’) now closed to new employees. As required by UK pension law, there is a Pension Trustee Board that, together with LHR Airports Limited, is responsible for governance of the Scheme. The employer’s contributions are determined based on triennial valuations conducted on assumptions determined by the Trustee and agreed by LHR Airports Limited. The defined benefit obligation or surplus is calculated quarterly by independent actuaries.

LHR Airports Limited also provides unfunded pensions in respect of a limited number of former directors and senior employees whose benefits are restricted by the rules of the Scheme. In addition, LHR Airports Limited provides post- retirement medical benefits to certain pensioners.

LHR Airports Limited operates a defined contribution pension scheme for all employees who joined the Group after 15 June 2008. The Group has no further payment obligations once the contributions have been paid. The total cost of defined contribution pension arrangements is fully expensed as employment costs.

Amounts arising from pensions related liabilities in the Company’s financial statements The following tables identify the amounts in the Company’s financial statements arising from its pension related liabilities. Further details of each scheme (except defined contribution schemes) are within sections a) and b).

Income statement - pension and other pension related liabilities costs

Year ended Year ended 31 December 31 December 2019 2018 £m £m Employment costs: Defined contribution schemes 15 13 BAA Pension Scheme 26 34 41 47 Finance (credit)/ charge - BAA Pension Scheme (1) 3 Finance charge - Other pension and post- retirement liabilities 1 1 Total pension costs 41 51

Other comprehensive income – (loss)/gain on pension and other pension related liabilities

Year ended Year ended 31 December 31 December 2019 2018 £m £m BAA Pension Scheme (loss)/gain (17) 141 Unfunded schemes 2 3 Actuarial (loss)/gain recognised before tax (15) 144 Tax credit/(charge) on actuarial (loss)/gain 4 (26) Actuarial (loss)/gain recognised after tax (11) 118

Statement of financial position – net defined benefit pension surplus/(deficit) and other pension related liabilities

The net deficit or surplus of the LHR Airports Limited retirement benefit schemes, being the BAA Pension Scheme, Unfunded Unapproved Retirement Benefit Scheme and Post-Retirement Medical Benefit Scheme, are recognised within non-current assets or non-current liabilities if the pension schemes are in a surplus or deficit position respectively. The net surplus or deficit is presented below for the current and previous four financial years.

ANNUAL REPORT AND ACCOUNTS 145

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

15 Retirement benefit obligations continued Amounts arising from pensions related liabilities in the Company’s financial statements continued Statement of financial position – net defined benefit pension surplus/(deficit) and other pension related liabilities continued

2019 2018 2017 2016 2015 £m £m £m £m £m Fair value of plan assets 4,302 3,869 4,085 3,975 3,288 Benefit obligation (4,269) (3,841) (4,209) (4,054) (3,184) Surplus/(deficit) in BAA Pension Scheme 33 28 (124) (79) 104 Unfunded pension obligations (28) (28) (29) (29) (22) Post-retirement medical benefits (1) (4) (5) (6) (6) Deficit in other pension related liabilities (29) (32) (34) (35) (28) Net surplus/(deficit) in pension schemes 4 (4) (158) (114) 76 Company share of net surplus/(deficit) in pension schemes 4 (4) (158) (114) 76

(a) BAA Pension Scheme The BAA Pension Scheme is a funded defined benefit scheme with both open and closed sections. The Scheme closed to employees joining the Group after 15 June 2008. The Scheme's assets are held separately from the assets of the HAH Group and are administered by the trustee.

The value placed on the Scheme’s obligations as at 31 December 2019 is based on the full actuarial valuation carried out at 30 September 2018. This has been updated at 31 December 2019 by KPMG LLP to take account of changes in economic and demographic assumptions, in accordance with FRS102. The Scheme assets are stated at their bid value at 31 December 2019. As required by FRS102, the Company recognises re-measurements as they occur in the statement of comprehensive income.

Analysis of movements in plan assets and defined benefit obligations 2019 2018 £m £m Fair value of plan assets at 1 January 3,869 4,085

Income statement: Interest income on plan assets 114 103 Administration costs (3) (3)

Other comprehensive income: Re-measurement gain/(loss) (return on assets in excess of interest income on plan assets) 413 (212) Loss due to Bulk Purchase annuity - (23)

Cash flows: Employer contributions (including benefits paid and reimbursed) 49 48 Members’ contributions 3 5 Benefits paid (by fund and Group) (143) (134) Fair value of plan assets at 31 December 4,302 3,869

Defined benefit obligation at 1 January (3,841) (4,209)

Income statement: Current service cost (23) (26) Past service cost - (5) Interest cost (113) (106)

Other comprehensive income: Re-measurements of defined benefit obligation: arising from changes in financial assumptions (629) 376 Arising from changes in demographic assumptions 137 - Experience gains 60 -

Cash flows: Members’ contributions (3) (5) Benefits paid (by fund and Group) 143 134 Defined benefit obligation at 31 December (4,269) (3,841) ANNUAL REPORT AND ACCOUNTS 146

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

15 Retirement benefit obligations continued (a) BAA Pension Scheme continued The net actuarial loss before tax of £17 million (2018: £141 million net gain) for the BAA Pension Scheme resulted from an increase in obligations due to lower net discount rate of £629 million (2018: £376 million gain), partially offset by an increase in assets £413 million due to over performance relative to discount rates (2018: £235 million loss). In addition, there was a £137 million gain (2018: £nil) attributable to updated demographic assumptions and £60 million experience gains (2018: £nil).

The actuarial loss on change in financial assumptions is mainly attributable to a decrease in the net discount rate of 0.65% over the year, based on a discount rate assumption of 2.10% and an RPI inflation assumption of 3.15%. The discount rate used has decreased from 3.00% in 2018 to 2.10% in 2019 and is derived from the yield on ‘high quality corporate bonds’ of duration consistent with liabilities of the scheme. The discount rate is based on a full yield curve approach, a ‘single agency’ approach where the yield curve is constructed from the Merrill Lynch corporate bond universe with at least one AA rating from the main ratings agencies.

Analysis of fair value of plan assets 31 December 2019 31 December 2018 Fair value of plan assets1 £m £m Equity 706 607 Property 147 139 Bonds 1,220 1,127 Cash 111 118 LDI 1,325 1,152 Buy in 322 299 Other 471 427 Total fair value of plan assets 4,302 3,869 1 Included in the fair value of plan assets above is £303 million (7.1%) valued at publicly quoted market price.

At 31 December 2019, the largest single category of investment was a liability driven investment (‘LDI’) mandate, with a value of £1,325 million (31% of the asset holding at 31 December 2019). The purpose of the Scheme entering into this mandate is to reduce asset/liability mismatch risk. At 31 December 2018, the largest single category of investment was an LDI mandate, with value of £1,152 million (30% of the asset holding at 31 December 2018).

LDI holdings are portfolios of interest rate and inflation derivatives which are intended to protect the Scheme from movements in interest rates and inflation, so that the fair value of this element of the portfolio moves in the same way as the fair value of Scheme’s obligations.

Analysis of financial assumptions The financial assumptions used to calculate Scheme assets and liabilities under FRS 102 were: 31 December 2019 31 December 2018 % % Rate of increase in pensionable salaries 1.90 1.90 Increase to deferred benefits during deferment 2.40 2.65 Increase to pensions in payment: Open section 3.05 3.30 Closed section 3.15 3.40 Discount rate 2.10 3.00 Inflation assumption 3.15 3.40

The assumptions relating to longevity underlying the pension liabilities at the reporting date are in line with those adopted for the 2018 actuarial funding valuation and are based on standard actuarial mortality tables with an allowance for future improvements in longevity. The assumptions are equivalent to a life expectancy for a 60 year old male pensioner of 26.8 years (2018: 27.2 years) and 27.9 years (2018: 29.5 years) from age 60 for a 40 year old male non-pensioner.

The expected rate of inflation is an important assumption for the salary growth and pension increase assumptions. A rate of inflation is ‘implied’ by the difference between the yields on fixed and index-linked government bonds.

Interest income on the plan assets is calculated by multiplying the fair value of the plan assets by the discount rate discussed above. As required under FRS102, interest income on the plan assets is calculated by multiplying the fair value of the plan assets by the discount rate discussed above.

ANNUAL REPORT AND ACCOUNTS 147

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

15 Retirement benefit obligations continued (a) BAA Pension Scheme continued Analysis of future cashflows

UK legislation requires that pension schemes are funded prudently. In September 2019, the trustee of the BAA Pension Scheme concluded a formal actuarial valuation of the Scheme as at September 2018. The next actuarial valuation of the BAA Pension Scheme will be measured as at 31 December 2021.

The September 2018 funding valuation identified a shortfall of £123 million, and LHR Airports have agreed deficit repair contributions of £20 million (previously £23 million) to eliminate the September 2018 funding valuation deficit by 2022.

The valuation also considered the cost of the benefits that will be built up over the remaining future lifetime of active members. The table below gives a breakdown of the future service cost at 30 September 2018 and the cost at 30 September 2015 for comparison. Active members pay contributions to the Scheme as a condition of membership.

Future service contributions over the future lifetime of 30 September 2018 30 September 2015 active members whilst employed by the Group % of base salary % of base salary including shift pay including shift pay Cost of pension benefits 26.4 24.2 Plus Administration expenses (including the PPF levy) 2.6 2.2 Less members’ contributions (3.4) (3.4) Employer future service contribution rate 25.6 23.0

Sensitivity analysis of significant assumptions The following tables present a sensitivity analysis for each significant actuarial assumption showing how the defined benefit obligation would have been affected, before and after tax, by changes in the relevant actuarial assumptions that were reasonably possible at the reporting date.

The standard market practice is to include sensitivity to a change of between 0.1% and 1%. Therefore 0.5% is considered to be reasonable and in line with market practice.

The range of long term inflation and long dated AA bonds over 2019 were c.0.4% and 0.8% respectively, so the choice of 0.5% is deemed to be acceptable as pension sensitivities are aligned to historical trends.

31 December 2019 (Decrease) / increase in defined benefit obligation

Before tax After tax £m £m Discount rate +0.50% discount rate (387) (317) -0.50% discount rate 445 365 Inflation rate +0.50% inflation rate 347 285 -0.50% inflation rate (311) (255) Mortality Increase in life expectancy by one year 180 148

The sensitivity analysis is based on a change in one assumption while holding all other assumptions constant, therefore interdependencies between assumptions are excluded, with the exception of the inflation rate sensitivity which also impacts salary and pension increase assumptions. The analysis also makes no allowance for the impact of changes in gilt and corporate bond yields on asset values. The methodology applied is consistent to that used to determine the recognised pension liability.

The total contributions by the Company to the defined benefit pension scheme in 2020 are expected to be £47 million. The levels of contributions are based on the current service costs and the expected cash flows of the defined benefit pension scheme. The Company estimates the present value of the duration of the Scheme liabilities on average fall due over 21 years (2018: 21 years).

Management believes that the scheme has no significant plan specific or concentration risks. ANNUAL REPORT AND ACCOUNTS 148

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

15 Retirement benefit obligations continued

(b) Other pension and post-retirement liabilities LHR Airports Limited also provides unfunded pensions in respect of a limited number of former directors and senior employees whose benefits are restricted by the Scheme rules. The unfunded pension obligations amount to £28 million (2018: £28 million) and are included in the statement of financial position.

In addition, LHR Airports Limited provides post-retirement medical benefits to certain pensioners. The present value of the future liabilities under this arrangement is £1 million (2018: £4 million) and this is also included in the statement of financial position. The value of these unfunded pensions has been assessed by the actuary using the same assumptions as those used to calculate the Scheme’s liabilities.

16 Provisions Reorganisation Home loss costs payment Other Total £m £m £m £m Current 6 7 - 13 Non-current - - 1 1 1 January 2019 6 7 1 14 Charged to income statement 4 - - 4 Utilised (5) (3) - (8) Released to income statement (1) - - (1) 31 December 2019 4 4 1 9

Current 4 4 - 8 Non-current - - 1 1 31 December 2019 4 4 1 9

Reorganisation costs These are costs associated with the Company’s reorganisation programmes primarily relating to restructuring processes designed to reduce the size and costs of various operational and overhead functions. The utilisation and release of the provision relates to the 2018 voluntary severance scheme in Airport Operations and Security. The charge relates to a provision established in 2019 primarily relating to Overhead functions.

Home loss payments Between 2005 and 2011, the Company entered into a number of agreements (Property Market Support Bonds) to buy residential properties in the previous third runway blight area. The purchase price for these properties included a deferred 10% payment (“deferred payment”) which was to be settled in cash when planning consent was obtained. In October 2016, the Government announced its decision in favour of expansion at Heathrow and following board approval, a public statement was issued by the Company stating its intention to apply for planning consent. Legal advice was that the Company would be required to pay the deferred payment. As a result, in the year ended 31 December 2016, the Company created a provision for the deferred payment equal to the amount it expects to pay of £7.5 million.

For the year ended 31 December 2019, the total amount utilised was £3.4m paid against 114 properties resulting in a closing balance of £4.1m. The Company expects the Property Market Support Bond Home Loss Payments to be concluded during the first half of 2020.

Other These provisions relate to insurance claims liability from incidents which occurred at Heathrow airport.

ANNUAL REPORT AND ACCOUNTS 149

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

17 Trade and other payables 31 December 2019 31 December 2018 £m £m Non-current Preference shares 23 23 Other payables 6 7 29 30 Current Deferred income 49 39 Trade payables1 156 166 Other tax and social security 9 8 Group relief payable 53 48 Other payables 7 11 Capital payables 137 135 Amount owed to group undertakings – interest free 54 56 Amount owed to group undertakings – interest bearing2 126 90 591 553 1 Trade payables are non-interest bearing and are generally on 30-day terms. 2 Amounts owed to group undertakings – interest bearing relates to an interest bearing loan an entity within the wholly-owned group with an interest rate of Bank of England base rate + 1.5%.

18 Share capital Called up, allotted and fully paid Number £m Ordinary shares 1 January 2019 36,602,497 37 Bonus issue1 663,000,000 663 Capital reduction2 - (665) Share restructuring3 (664,622,373) - 31 December 2019 34,980,124 35 1 On 19 November 2019, the Company capitalised £663,000,000 of unrealised profits by a bonus issue of 663,000,000 ordinary shares of £1.0 each. 2 On the same date, the Company reduced its nominal share capital from £1.0 to £0.05p, realising £665,000,000 which in law creates a distributable reserve. 3 On 19 November 2019, the Company consolidated its existing capital structure by converting 699,602,497 ordinary shares of 0.05p into 34,980,124 ordinary shares of £1.

Preference shares1 Number £ 1 January and 31 December 2019 21,960,014 preference shares – irredeemable of £0.01 each 21,960,014 219,600 1 Recorded within creditors (refer to Note 17).

19 Dividends paid During the year ended 31 December 2019, the Company paid dividends of £421 million to Heathrow (AH) Limited being £2 million (interest) on 01 March 2019, £100 million (£2.73 per share) on 11 March 2019, £95 million (£2.60 per share) on 27 June 2019, £100 million (£2.73 per share) on 02 July 2019 and £124 million (£3.56 per share) on 20 December 2019. The dividend paid on 20 December 2019 follows the restructuring of the Company's ordinary share capital as described in note 18. (2018: £112 million (£0.04 per share) on 21 February 2018, £98 million (£0.04 per share) on 27 June 2018, £114 million (£0.04 per share) on 23 July 2018 and £159 million (£4.34 per share) on 20 December 2018. The dividend paid on 20 December 2018 follows the restructuring of the Company's ordinary share capital as described in note 18).

20 Commitments and contingent liabilities Non-cancellable operating lease commitments – Company as a lessee Total future minimum rentals payable as at the year end are as follows:

31 December 2019 31 December 2018 Land and Land and buildings Other buildings Other £m £m £m £m Within one year 14 30 14 25 Within two to five years 26 102 41 106 After five years 3 465 4 481 43 597 59 612

The Company leases various offices, warehouses, plant and machinery under non-cancellable operating lease agreements.

ANNUAL REPORT AND ACCOUNTS 150

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

20 Commitments and contingent liabilities continued Non-cancellable operating lease commitments – Company as a lessee continued A significant portion of the commitments classified as ‘other’ relate to the UK Power Networks Services Limited ‘UKPNS’ ‘UKPNS Lease’. The amounts disclosed are the total estimated charges under the agreement including both the actual lease commitment and the significant maintenance element of the fee payable to UKPNS, as neither the Company nor UKPNS are able to split the base fee between a ‘capital’ and ‘maintenance’ charge. This is because the component parts within the distribution network will be replaced throughout the arrangement.

Non-cancellable operating lease commitments – Company as a lessor Total future minimum rentals receivable as at the year end are as follows:

31 December 2019 31 December 2018 Land and buildings Land and buildings £m £m Within one year 78 88 Within two to five years 206 225 After five years 1,644 1,698 1,928 2,011

The Company uses a number of different leasing and contractual structures depending on the type and location of the investment property. Typically in multi-let offices and industrial premises a standard indefinite tenancy is used, which is terminable by the tenant on three months’ notice at any time. However, it is common for the accommodation to remain let or be quickly re-let should it be vacated. For larger, stand-alone premises, e.g. cargo sheds, longer leases of multiples of three years are used.

Car rental facilities are operated under concession agreements subject to minimum guaranteed payments and the amounts are included above. Public car parks are covered by a single management contract.

Commitments for capital expenditure 31 December 2019 31 December 2018 £m £m Contracted for, but not accrued: Baggage systems 111 77 Terminal restoration and modernisation 168 174 IT projects 15 20 Capacity optimisation 51 20 Other projects 45 35 390 326

The figures in the above table are contractual commitments to purchase goods and services at the reporting date. Capital expenditure for the extended Q6 regulatory period from 1 April 2014 to 31 December 2019 was £3.5 billion (excluding expansion related costs). The Q6 capital programme was primarily focussed on asset replacement and compliance related projects, together with sustaining and improving the passenger experience. Capital spend in 2020 is forecast to be in the region of £723 million (excluding expansion related costs).

Other commitments Heathrow Airport Limited has a commitment to pay £80 million to the Department for Transport in relation to the Crossrail project in return for a service commitment for Crossrail to operate services to Heathrow for 15 years, with payment expected during 2020. The amount will be included as an intangible asset in the financial statements and will be added to the RAB in accordance with the Q6 regulatory settlement.

Following the Government decision in October 2016 for Heathrow as preferred option for expansion, the Company recognises that up to 62 residential property owners could exercise their right under the previous scheme for which bonds were issued, to redeem those bonds at some point in the future. The Company’s best estimate of the total payment is £21 million based on a valuation in accordance with the terms set out in the bond contract and assumes all the bondholders will exercise their option to sell. Twelve houses were purchased in 2019 for a total cost of £6 million. Therefore, the number of properties where bondholders have yet to exercise the option to sell is 50 and the commitment remaining is £15 million.

Following the designation of the Airports National Policy Statement on 26th June 2018, Heathrow has signed a Blight indemnification agreement with the Department for Transport, such that the Company will take responsibility for any successful claims for statutory blight of residential property under certain conditions. The current estimate is that this would result in Heathrow’s obligations to buy properties worth £9.5m. It is expected that the cost of purchased properties will be added to the RAB.

ANNUAL REPORT AND ACCOUNTS 151

Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

21 Related party transactions The Company is exempt under the terms of FRS 102 from disclosing related party transactions with entities that are wholly- owned subsidiaries of the FGP Topco Limited Group.

During the year the Company entered into the following transactions with related parties that are not wholly owned subsidiaries of the FGP Topco Limited Group.

Sales to related Purchases from Amounts owed party related party by related party 2019 2018 2019 2018 2019 2018 Related party £m £m £m £m £m £m Amey OWR Ltd - - 1 1 - - Ferrovial Agroman - - 44 69 - - Harrods International Limited 23 23 - - - - Qatar Airways 36 35 - - 2 2 QS Airports UK, LP ------59 58 45 70 2 2

The related parties above are related through ownership by the same parties. Related party transactions relate primarily to construction projects, loans and interest payable, and are conducted on an arms-length basis.

22 Ultimate parent undertaking and controlling party The immediate parent undertaking of the Company is Heathrow (AH) Limited, a company registered in England and Wales.

The ultimate parent entity is FGP Topco Limited, which is the parent undertaking of the largest group to consolidate these financial statements. The shareholders of FGP Topco Limited all hold ordinary shares in the following proportion; Hubco Netherlands B.V. (25.00%) (an indirect subsidiary of Ferrovial, S.A., Spain), Qatar Holding Aviation (20.00%) (a wholly- owned subsidiary of Qatar Holding LLC), Caisse de dépôt et placement du Québec (12.62%), Baker Street Investment Pte Ltd (11.20%) (an investment vehicle of GIC), QS Airports UK, LP (11.18%) (investment vehicle managed by Alinda Capital Partners), Stable Investment Corporation (10.00%) (an investment vehicle of the China Investment Corporation) and USS Buzzard Limited (10.00%) (wholly-owned by the Universities Superannuation Scheme).

The Company’s results are also included in the audited consolidated financial statements of Heathrow (SP) Limited for the year ended 31 December 2019, which is the parent undertaking of the smallest group to consolidate these financial statements. They are also included in the audited consolidated financial statements of Heathrow Finance plc and Heathrow Airport Holdings Limited for the year ended 31 December 2019.

Copies of the financial statements of FGP Topco Limited, Heathrow Airport Holdings Limited, Heathrow Finance plc and Heathrow (SP) Limited may be obtained by writing to the Company Secretarial Department at The Compass Centre, Nelson Road, Hounslow, Middlesex, TW6 2GW. This is the registered office for the smallest and the largest undertaking to consolidate these financial statements.

23 Subsequent events

All subsequent events are considered to represent non-adjusting events under FRS 102.

Dividend

On 20 February 2020, the Board approved a dividend payment of £106 million (to fund dividends to the shareholders of FGP Topco Limited). The dividend was paid on 27 February 2020.

Airport expansion

On 27 February 2020, the Court of Appeal concluded that the Government was required but failed to take account the Paris Climate Agreement when preparing the Airports National Policy Statement (‘ANPS’). The Court declared that the ANPS has no legal effect unless and until the Government carries out a review of the policy.

The Government declined to appeal to the Supreme Court directly, but Heathrow and other interested parties have applied for permission to appeal the Court of Appeal ruling.

ANNUAL REPORT AND ACCOUNTS 152 Heathrow Airport Limited

Notes to the Company financial statements for the year ended 31 December 2019 continued

23 Subsequent events continued Covid-19

The spread of COVID-19 represents a material challenge for the global aviation industry. The pandemic has had a material impact on our operations and Heathrow’s financial performance 2020 will be significantly impacted. In response to COVID- 19 we have taken immediate action to safeguard Heathrow’s financial resilience including temporarily shrinking our operation to a single runway in Terminals 2 and 5, cancelling executive pay, a companywide pay reduction and bonus cancellation, freezing recruitment and removing all non-essential costs

From March 2020 COVID-19 has materially impacted our trading results, passenger numbers were down by 52% in March 2020 and by 97% in April. Management have considered the impact that COVID-19 will have on our 2020 trading results. However, uncertainty around how long the pandemic will last and its medium to long term effect on the aviation industry, means that the financial impact cannot be estimated with any degree of accuracy in the long term at this time.

The macroeconomic impact of COVID-19 may have an impact on the carrying values of our assets and liabilities, however the uncertainty regarding the duration of impact means it is difficult to estimate the financial impact at this point. In regard to our trade receivable position at 31 December 2019, we recognise that a number of airlines are in financial difficulty as a result of the COVID-19 pandemic, however, we have collected the majority of trade debtor balances that existed at 31 December 2019.

As reported in Heathrow's Q1 results, COVID-19 and the delay to expansion (following the Court of Appeal’s ruling to suspend the Airports National Policy Statement) have had an impact in Q1 of 2020, this includes a reduction in the non-cash fair value of our investment properties of £184 million, an exceptional charge of £82 million and a £218 million increase in the surplus of the defined benefit pension scheme. The Group carried out a detailed review of its organisational design to simplify operations and reduce costs. As a result, the Group made a provision in Q1 for £30 million of exceptional costs relating to this transformation programme. The Group has also reviewed their investment projects. As a result of the impact of the COVID-19, certain projects have been placed on hold while some projects are unlikely to be restarted in the foreseeable future. This resulted in an exceptional write-off of previously capitalised costs of £52 million in the period. These costs remain on the RAB and continue to generate a return.

We will continue to monitor the situation over the coming months and will provide updates as required.

ANNUAL REPORT AND ACCOUNTS 153 Heathrow Airport Limited

Alternative Performance Measures (APMs) - Unaudited

The Company presents its results in accordance with United Kingdom Generally Accepted Accounting Practice ('UKGAAP') - Financial Reporting Standard 102 ('FRS 102'). Management also uses other financial measures not defined by FRS 102 as APMs (Alternative Performance Measures). Management relies on these APMs for decision-making and for evaluating the company’s performance. Below we provide an explanation of each APM.

EBITDA

EBITDA is profit before interest, taxation, depreciation and amortisation. EBITDA is a useful indicator as it is widely used by investors, analysts and rating agencies to assess operating performance.

2019 2018

£m £m Profit for the year 631 446 Add: tax charge 188 156 Add: net finance cost 316 565 Operating profit 1,135 1,167 Add: depreciation and amortisation 736 742 EBITDA 1,871 1,909

Adjusted EBITDA

Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value gains and losses on investment properties. Adjusted EBITDA is an approximation of pre-tax operating cash flow and reflects cash generation before changes in working capital and investment. The APM assists investors to value the business (valuation using multiples) and rating agencies and creditors to gauge levels of leverage by comparing Adjusted EBITDA with net debt.

2019 2018

£m £m Profit for the year 631 446 Add: tax charge 188 156 Add: net finance cost 316 565 Operating profit 1,135 1,167 Add: depreciation and amortisation 736 742 Less: fair value gains on investment property (43) (117) Adjusted EBITDA 1,828 1,792

Adjusted operating profit

Adjusted operating profit shows operating results excluding fair value adjustments. These are excluded as they can vary significantly from one year to the next due to market perceptions of the value of the property and the accounting method used to calculate the fair value. The adjusted measure is used to assess underlying performance of the business.

2019 2018

£m £m Operating profit 1,135 1,167 Less: fair value gains on investment property (43) (117) Adjusted operating profit 1,092 1,050 * Operating profit is presented on the Company Income statement, there is no mandatory requirement to disclose an operating profit line however it is a generally accepted profit measure

ANNUAL REPORT AND ACCOUNTS 154

Heathrow Airport Limited

Alternative Performance Measures (APMs) - Unaudited

Net finance costs before certain re-measurements

Net finance cost before certain re-measurements exclude fair value adjustments on financial instruments. Excluding fair value adjustments can be useful to investors and financial analysts when assessing the Company’s underlying profitability, because they can vary significantly from one year to the next. A significant portion of the fair value adjustments on financial instruments occur due to the business entering into arrangements to hedge against future inflation. As these contracts do not meet hedge criteria under IFRS 9, fair value adjustments create significant volatility in our income statement.

2019 2018

£m £m Finance income 206 193 Finance cost (522) (758) Net finance cost (316) (565) Less: fair value (gain) / loss arising on re-measurement of financial instruments (95) 98 Net finance cost before certain re- measurements (411) (467)

Adjusted profit before tax

Adjusted profit before tax (PBT) excludes fair value adjustments on investment properties and financial instruments. Excluding fair value adjustments can be useful to investors and financial analysts when assessing the Company’s underlying profitability, because they can vary significantly from one year to the next.

2019 2018

£m £m Profit before tax 819 602 Less: fair value gain on investment properties (43) (117) Less: fair value (gain) / loss arising on re-measurement of financial instruments (95) 98 Adjusted PBT 681 583

Adjusted profit after tax

Adjusted profit after tax (PAT) excludes fair value adjustments and financial instruments and the associated tax. Excluding fair value adjustments can be useful to investors and financial analysts when assessing the Company’s underlying profitability, because they can vary significantly from one year to the next.

2019 2018

£m £m Profit after tax 631 446 Less: fair value gain on investment properties (43) (117) Less: fair value (gain) / loss arising on re-measurement of financial instruments (95) 98 Add: tax on fair value gain on investment properties and re-measurement of financial instruments 24 8 Adjusted PAT 517 435

Regulatory Asset Base (RAB)

The regulated asset base is a regulatory construct, based on predetermined principles not based on FRS102. By investing efficiently in the Airport, we add to the RAB over time. The RAB represents the invested capital on which Heathrow are authorised to earn a cash return. It is used in key financial ratios and in our regulatory accounts.

2019 2018 £m £m Regulatory Asset Base (RAB) 16,598 16,200

ANNUAL REPORT AND ACCOUNTS 155

Heathrow Airport Limited

Alternative Performance Measures (APMs) - Unaudited

Regulatory gearing ratio

The regulatory gearing ratio is consolidated nominal net debt to the RAB. It is a financial indicator used by investors, financial analysts, rating agencies, creditors and other parties to ascertain a company’s debt position in regulated industries.

Gearing ratios 2019 2018 Total net debt to RAB 0.75 0.77 Senior net debt to RAB 0.67 0.68

ANNUAL REPORT AND ACCOUNTS 156

Heathrow Airport Limited The Compass Centre Nelson Road Hounslow Middlesex TW6 2GW www.heathrow.com

Company registration number: 01991017